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Gasoline Pushes US Inflation Higher in August

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Ed Dolan
Ed Dolan

The document summarizes inflation data from the August 2012 Consumer Price Index report. It notes that while headline inflation spiked to 7.44% due to a rise in gasoline prices, core inflation fell to 0.6%. The trimmed mean inflation rate also remained low at 2%. The document discusses how economists look at various inflation measures and the Federal Reserve's 2% inflation target when making monetary policy decisions like quantitative easing.

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Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Gasoline Pushes CPI Inflation Higher in August but Core Inflation Falls Posted Sept. 15, 2012 Terms of Use: These slides are made available under Creative Commons License Attribution— Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.
Headline Inflation Spikes Sharply in August  The all-items consumer price index rose at an annual rate of 7.44% in August, the highest monthly rate of inflation in over three years.  It was the first time since March that headline inflation had exceeded an annual rate of 1%  Nearly all of the increase was attributable to a jump in gasoline prices, which jumped by 9% in the month of August alone. The year-on- year change in gasoline prices was just 1.8% Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Core Inflation Fell in August  Food and energy prices are volatile and usually account for much of the month-to-month change in the CPI  Their effect can be removed by taking food and energy out of the CPI. The result is called the core inflation rate.  The rate of core inflation for August, stated as an annual rate, was 0.6%, about half of the July rate. Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Trimmed Mean Inflation Also Remains Low  Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month (or decrease most), whatever they are  The 16 percent trimmed mean CPI slowed to an annual rate of 2 percent in August Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Which Measure is Best?  The CPI for all items gives the most accurate measure of current changes in the cost of living  Economists at the Fed look closely at the core and trimmed mean CPIs to judge the effect of monetary policy on underlying inflationary trends  The Fed considers inflation of about 2 percent to be consistent with prudent monetary policy. Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
The Longer Term Trend  To see longer term trends in inflation, it is useful to look at year- on-year changes, which compare each month’s price level with that of the same month in the year before  All y-o-y measures of inflation rates slowed during the global recession, then rose again for most of 2011.  The three measures shown here have moved steadily downward in 2012. All now below the Fed’s 2 percent target Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
Inflation and Quantitative Easing  At its September 2012 meeting, the Federal Open Market Committee of the Federal Reserve System voted to undertake a new round of expansionary monetary policy, known as quantitative easing.  The Fed made that decision on the basis of low rates of inflation for core measures and related data from the GDP accounts  The Fed’s decision came before the August CPI figures came out, but it is unlikely it would have been influenced by the one-month spike in headline inflation Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

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Gasoline Pushes US Inflation Higher in August

  • 1. Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Gasoline Pushes CPI Inflation Higher in August but Core Inflation Falls Posted Sept. 15, 2012 Terms of Use: These slides are made available under Creative Commons License Attribution— Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.
  • 2. Headline Inflation Spikes Sharply in August  The all-items consumer price index rose at an annual rate of 7.44% in August, the highest monthly rate of inflation in over three years.  It was the first time since March that headline inflation had exceeded an annual rate of 1%  Nearly all of the increase was attributable to a jump in gasoline prices, which jumped by 9% in the month of August alone. The year-on- year change in gasoline prices was just 1.8% Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 3. Core Inflation Fell in August  Food and energy prices are volatile and usually account for much of the month-to-month change in the CPI  Their effect can be removed by taking food and energy out of the CPI. The result is called the core inflation rate.  The rate of core inflation for August, stated as an annual rate, was 0.6%, about half of the July rate. Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 4. Trimmed Mean Inflation Also Remains Low  Another way to remove volatility is the 16% trimmed mean CPI published by the Federal Reserve Bank of Cleveland. It removes the 8% of prices that increase most and the 8% that increase least in each month (or decrease most), whatever they are  The 16 percent trimmed mean CPI slowed to an annual rate of 2 percent in August Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 5. Which Measure is Best?  The CPI for all items gives the most accurate measure of current changes in the cost of living  Economists at the Fed look closely at the core and trimmed mean CPIs to judge the effect of monetary policy on underlying inflationary trends  The Fed considers inflation of about 2 percent to be consistent with prudent monetary policy. Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 6. The Longer Term Trend  To see longer term trends in inflation, it is useful to look at year- on-year changes, which compare each month’s price level with that of the same month in the year before  All y-o-y measures of inflation rates slowed during the global recession, then rose again for most of 2011.  The three measures shown here have moved steadily downward in 2012. All now below the Fed’s 2 percent target Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com
  • 7. Inflation and Quantitative Easing  At its September 2012 meeting, the Federal Open Market Committee of the Federal Reserve System voted to undertake a new round of expansionary monetary policy, known as quantitative easing.  The Fed made that decision on the basis of low rates of inflation for core measures and related data from the GDP accounts  The Fed’s decision came before the August CPI figures came out, but it is unlikely it would have been influenced by the one-month spike in headline inflation Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com