Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

As we looked at the consumer price data for November and December, we were surprised at the large decline in core prices in November. In examining the detail, the declines were in some components for which we did not expect continued large price reductions. One of the categories in which we saw huge price declines in the fourth quarter was used cars, which was probably related to the price incentives on new cars. Those declines were big enough to matter for the actual total price indexes. We looked at that, and we didn’t expect prices for used cars to bounce back up, but then again we didn’t think they would continue to go down at a double-digit pace either. As we went through other categories, it seemed to us that in the last couple of months the prices for some particular categories were affected a lot by special circumstances. We saw that early in the year, too, when prices in certain categories moved up and then down or moved down and then back up again, and the three-month change in core inflation moved around a lot relative to the twelve-month change. I think we showed a chart in the pre-FOMC briefings several times last year depicting that pattern. The two series are converging and are fairly close together—the latest three-month change is a little below the twelve-month change—so we do think that prices are a little low now and will probably move up a bit in coming months. We aren’t talking about a big bounceback; these are still monthly changes of around 0.1percent on core CPI. That is just enough relative to what happened in November and December to have this measure tick up a bit relative to the fourth quarter.

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