In January, the United States saw its first dip in overall prices in five years. This is most likely driven by the fall in oil prices since the Summer of 2014. While this dip is interesting, some U.S. economists emphasize that the American economy has not suddenly become the Eurozone or Japan, and this does not necessarily reflect the underlying health of the economy. The fall in consumer prices primarily comes from the energy sector where costs fell roughly 20% over the course of last year. Consumer prices outside of energy illustrate a different story. For example, food costs are up 3.2%, shelter costs are up 2.9%, medical care costs rose 2.3%, and without energy consumer prices rose 1.9% in January. John Williams, president of the San Francisco Fed, stated that he believed inflation will rise to the Fed’s desired level by the end of 2016. Yellen reinforced the emphasis on the energy sector in her testimony to Congress, but also cautioned that inflation in other areas has slowed since last summer. There have also been comments that a tightening labor market could put upward pressure on wages. Many analysts also believe oil prices are about to rebound, which might rebound overall consumer prices. It is interesting to see how energy can have such a severe effect on inflation as the Fed continues to strive for their target inflation of 2%. This might also have an interesting effect on interest rates as the Fed has hinted at raising them in the near future.
Source: http://www.wsj.com/articles/consumer-price-index-down-0-7-in-january-1424958010
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See the earlier post by Keifer (and probably posts by others) on “core” versus “headline” inflation. I suggested in the comments that you all should look at “trimmed mean” inflation.
In researching the trimmed mean inflation rate I found that it basically excludes the highest and lowest prices each month while the core inflation excludes the same two factors each time (food and energy) no matter if there are strong movements within them. Overall headline inflation is more volatile than core inflation (see graph http://leedsonfinance.com/2011/05/19/core-vs-headline-inflation/) which indicates that food and energy are the more volatile sectors. However, to ignore these two important sectors, as Yellen would propose, is not understanding the full picture of the economy. The Dallas Fed calculates the trimmed mean inflation and comparisons between the three types of inflation measures can be seen here: http://www.dallasfed.org/research/pce/.
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