January's Consumer Price Index (CPI), released Friday by the Labor Department, reveals a slight rise in prices last month, after siginificant drops in the last quarter of 2008--November's 1.6% drop was the largest since the government starting tracking consumer prices 61 years ago.  A lot of consumers, many with less to spend than recent years, welcome lower prices.  But given the overall trend during this recession, especially when compared to other recessions, some economists have been concerned about deflation.  See the below graph from the St. Louis Fed.

But James Hamilton, of UC-San Diego and Econobrowser, who has been concerned about deflation, sees some good news in the latest figures.  He says the .3% rise in the CPI for last month projects out to a 3.4% annual inflation rate--just above the 3% mark that he deems necessary (more on that below). 

Hamilton's enthusiasm remains tempered.  The 2.2% drop in the CPI since October works out to a -8.7% annualized deflation rate.  But he thinks these statistics are "worth watching."

The core motivation for policy stimulus is the perceived need to increase aggregate nominal spending. Some have claimed that with the nominal T-bill rate near zero, monetary policy is no longer capable of providing such a stimulus. I disagree with that assessment, though I can understand that it is a very legitimate position to take. But if we do get back up to a year-over-year 3% inflation rate, I would think that an objective observer would want to agree at that point that we've achieved all we can hope for with the tool of demand stimulus. I continue to recommend that the Federal Reserve think of achieving that 3% inflation rate as their primary policy objective at the moment.

Read the full post here. 

 The Bureau of Labor Statistics has a very useful Q&A on misconceptions about the CPI here.