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Euro area “lowflation” becomes “deflation”

Inflation in the euro area is measured by the Harmonized Index of Consumer Prices (HICP). “Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices for the euro area of below 2%” (the red horizontal line). The Governing Council of the ECB clarified that this target should be interpreted as “below, but close to, 2% over the medium term.” In the euro area, as in several other advanced economies, inflation was below target but above zero for about two years (see Contessi, De Pace, Li, 2014). The IMF recently defined this environment as “lowflation.”

The most recent measurements for the euro area have shown mild deflation, with year-on-year inflation rates slightly below zero. Most recently, low inflation rates across many countries have been due to a combination of economic slack in the global economy and low oil prices. The weak economic conditions in the euro area are an additional factor pushing its inflation rates even lower.

How this graph was created: Search for “Harmonized CPI,” and the series shown here should appear first in the list. Change units to “Percent Change from Year Ago.” To add the red horizontal line, use the new feature in FRED to create a user-defined line: Open the “ADD DATA SERIES” panel, select “Trend Line,” and change both the start and end values to 2.

Suggested by Silvio Contessi.

View on FRED, series used in this post: CP0000EZ17M086NEST

Distance to inflation target

In a recent St. Louis Fed On the Economy blog post, I plotted the distance from the inflation target for 9 advanced economies in January 2014. Instead of looking at a cross-section of countries, we could look at the time series for the United States or any other economy for which we know the target and have a time series in FRED. Several countries set their inflation target at or close to 2% as measured by the year-on-year growth of the consumer price index (a Laspeyres index). However, the U.S. Federal Reserve uses the personal consumption expenditures price index (a Fisher Ideal quantity index). To understand the difference between the two, see this BLS paper: “An Examination of the Difference Between the CPI and the PCE Deflator.”

For a recent take on the advantages of using one measure over the other, see St. Louis Fed President Jim Bullard’s article in the Regional Economist, “CPI vs. PCE Inflation: Choosing a Standard Measure.”

In the graph, I plot the difference between the actual inflation rate (measured in either CPI or PCE) and the inflation target in the United States as discussed in the “Statement on Longer-Run Goals and Monetary Policy Strategy.”

This target is typically considered a medium-run objective, so it is normal to observe short-lived deviations from the target. However, inflation in the United States has been below target for quite some time, and it is an open question when it will return closer to the 2% target (close to the zero line in the graph).

How this graph was created: First, load the two series. Then for each series, select “Percent change from year ago” as the unit of measure and use the “Create your own data transformation feature” and enter the formula “a-2.” Finally, in the graph settings, select type “Area.”

Suggested by Silvio Contessi.

View on FRED, series used in this post: CPIAUCSL, PCEPI


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