Deflation? Not really. Inflation? Not much of that, either

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Consumer prices fell 0.4% from March 2008 to March 2009, the first such year-over-year decline since 1955. That’s the headline out of today’s inflation report from the Bureau of Labor Statistics. As with almost all such headlines, though, it’s misleading. The big fall in prices actually came last October through December, as the global financial panic sent energy prices plummeting in anticipation of much-reduced demand. There was another, much smaller, drop in energy prices in March, which resulted in the first month-to-month Consumer Price Index drop (-0.1%) since December. But when you strip out the always volatile energy and food components, core inflation for the month of March was 0.2%, exactly the same as in January and February. On a year-over-year basis, it was 2.2%. Yesterday’s Producer Price Index release showed a more pronounced downward trend (-1.2%), but that’s to be expected, as manufacturing costs are closely linked to energy and other commodity prices.

Up until this fall, lots of people were making fun of the Federal Reserve’s focus on core inflation. Energy prices, and thus consumer prices, were rising sharply. But the Fed kept talking about how the core numbers looked good. Now we’re getting a nice demonstration of why the Fedsters do that—it gives a clearer, less noisy picture of the actual inflation trend that should determine monetary policy. That trend is currently pretty close to flatlining. There’s a risk of serious deflation if the economy keeps getting worse, and there’s a risk of serious inflation if it suddenly gets dramatically better. I’d rate the first risk as a bigger threat for the immediate future, and clearly the Fed does too. But it’s not here yet. Just to compare: Consumer prices dropped 6.4% in 1930, 9.3% in 1931, and 10.3% in 1932.