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December 19, 2011

Datastream Chart of the Week: Improving Inflation News Gives Fed More Options

by Alpha Now Research Team.

The data for November is in – and the picture it paints of the US economy is one of weakness but also waning inflationary pressures. If the former continues to weigh on American spirits heading into the year-end holiday season, the latter at least provides the Federal Reserve with more latitude to try yet again to give the still-weak economy another boost.

As can be seen in this week’s Datastream Chart of the Week, below, unemployment rates in the United States have retreated slowly from the high levels seen during and in the wake of the markets crisis, only recently and reluctantly breaking below the 9% level to 8.6% in November. (The unemployment rate from 1950 through to the present day is represented by the orange line in the chart below.) In contrast, inflationary pressures have been far more robust, bouncing back quickly in large part due to higher food and energy costs.

Last Friday, the Labor Department reported that the Consumer Price Index (the CPI, represented by the blue line in the chart below) was unchanged for the 12-month period ending in November, a better outcome than economists – who had forecast an increase of 0.1% — had expected. That leaves the CPI up 3.4% over the last 12 months, down from a three-year high of 3.9% in September. The recent decline comes as prices for automobiles fell, as well as energy costs, meaning that Americans had to use slightly less of their disposable income to fill the gas tanks of their vehicles.

This chart is the latest in a regular series that we will provide each week, each based on data from Thomson Reuters Datastream and illustrating an economic theme and its impact on the market. After a year-end hiatus, the Datastream Chart of the Week will return to AlphaNow the week of January 9, 2012.

This week’s chart displays not only the official data that combine to make American consumers feel beleaguered today, but also the unofficial “misery index”. That metric simply combines the inflation and unemployment rates and transforms them into a single easy-to-read index level. Americans aren’t quite as miserable as they were in September, when that index hit a 28-year-high of 12.7, but with the index still hovering around 12, economic misery is still on their minds as they grapple with the toxic mix of high unemployment rates and CPI levels that, while lower than they have been, remain high relative to the level of economic growth.

That the misery index – a phrase coined when Ronald Reagan was a presidential candidate battling to unseat President Jimmy Carter by challenging his handling of the then-moribund economy – is back in the headlines may not be good news for either politicians or other policy-makers. But at least the recent retreat in the inflationary pressures will give those within the Federal Reserve a little more room to maneuver to help move the economy onto firmer ground in the new year.

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