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It turns out that the policymaking arm of the U.S. Central Bank, the Federal Reserve Board, has determined that theCPIis not the best price index

It turns out that the policymaking arm of the U.S. Central Bank, the Federal Reserve Board, has determined that theCPIis not the best price index to measure price movements in the economy.In its place, the Fed looks at the price index forpersonal consumption expenditures (PCE), which is a narrower index than theCPI.(The Fed's target inflation rate = 2.0% per year.)

As you'll see, however, the Fed (and others) also monitor the "core PCE," which is the PCE excluding food and energy prices.

Some argue, though, that the "core PCE" is not a good indicator, given that households must purchase food and energy on a regular basis.In response, the Federal Reserve Bank of Dallas calculates a"trimmed" mean PCEinflation rate that omits price changes for goods and services that show the largest and smallest movements in a given month, so that extreme price movements of those goods have less impact on the measured inflation rate.(We'll refer to this series as the "TRIM" series.)

So what's going on right now with each of these measures?Good question.You're going to use FRED to graph them to see for yourselves!

So let's add eachmonthlyseries separately in the order below.

(i)Plot the Dallas Fed "Trim" series "PCETRIM12M159SFRBDAL".The default unit of this series is "Percent Change from Year Ago," which is what you want.

(ii)While in "Edit Line 1," click on "Add Line." Then add the "Personal Consumption Expenditures" series "PCEPI" by typing in the code, clicking on the correct series and pressing "Add Data Series."(The series complete name is "Personal Consumption Expenditures: Chain-type Price Index.")While in "Edit Line 2," change the units to "Percent Change from Year Ago."

(iii)While in "Edit Line 2," click on "Add Line."Then add the core PCE (PCE excluding food and energy "Chain-type Price Index") series "PCEPILFE" by typing in the code, clicking on the correct series, and pressing "Add Data Series."

(iv)Finally, while in "Edit Line 3," click on "Add Line."Then add the CPI series"CPIAUCSL" by typing in the code, clicking on the correct series, and pressing "Add Data Series.Make sure "Percent Change from Year Ago" is the units for this CPI series as well.

Now that you've added all fourmonthlydata series, to see what's happening of late more clearly, you'll want to define the period ofSeptember 2017 -February 2021by identifying the correct beginning and ending months and years in the two date boxes located just above your graph.

You should now have a graph of four data series, each showing a different measurement of the monthly annual inflation rate since September 2017.

(a)Which two series of the four show the most variability since January 2020?

(b)Which two series of the four show the least variability?

(c)Refer to the evolution of the TRIM series since January 2020.Given what you know about the Great Pandemic Recession so far, explain why you think this inflation measure is the best overall measure of inflation trends over the past months.

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