The annual US inflation rate for the 12 months ended in June, 2009 was -1.43 percent. The US inflation rate one year ago was 5.02 percent. The fall in inflation rates from May to June provides evidence that the short term inflation trend is down. If that trend continues, we should see an inflation rate for the 12 months ended in July, 2009 that is close to -1.57 percent. The average rate over the last 10 years was 2.70%. Lower inflation over the last 12 months compared to the average inflation over the last 10 years serves as an indicator that the long term trend in the US Inflation Rate is down. Inflation expectations should be adjusted accordingly. Need to Tighten to Prevent Inflation
The US Government's inflation economics policy attempts to control inflation. High inflation and negative inflation can have damaging effects on the economy. The Federal Reserve will need to rein in accommodative measures to prevent inflation.
"Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period," Bernanke said in an op-ed article dated July 20 seen on the Wall Street Journal website.
Bernanke pointed out two ways the Fed can tighten policy: raising the interest rate on bank reserves held at the Fed, and reducing the overall stock of reserves.
