Great Graphic: Five Different Measures of US Inflation

This Great Graphic was posted on FT Alphaville and it comes from Credit Suisse.  It shows different measures of inflation.  The Fed's preferred measure is the core PCE (deflator).  However, it is sensitive to other measures as well. 

Perhaps it is like the different measures of unemployment.  There is no true or right measure of unemployment.  There are different measures and each has a different use.  It turns out that the commonly used U3 measure follows the guidelines established by the International Labor Organization and allows for more meaningful international comparisons.  

Fed officials have largely played down the drift lower in prices.  Bernanke himself suggested that he was not worried as inflation expectations remain anchored near 2%.   This is perhaps one of the benefits of QE--namely helping to underpin inflation expectations that is among the least commented consequence.  

The Fed may be right to play down the decline in the measured inflation, though a couple more soft reports could make it become more salient.  Given the monthly increases seen in Q2 12, it is possible that as these drop out of the year-over-year comparisons, core PCE still drifts lower.  However, the second half will be a different story.  In the second half of last year, core PCE rose by a cumulative 0.3%.    Core PCE rose 1.1% on a year-over-year basis through March, the most recent data, but in Q1, the annualized pace was 1.6%.  

Bernanke and the majority of the Federal Reserve say that a few more months of data is before deciding if it should taper of the long-term asset purchases.  Because the economy did not enter a self-sustaining growth phase, it can be judged that QE1 and QE2 ended prematurely.  Bernanke and Co don't want to make the same mistake a third time.