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By New Deal Democrat

One of my running themes for the last few years is how the engaging or loosening of the "oil choke collar" explains the acceleration and deceleration of the economy in general, and the inflation rate in particular. In an era of paltry average wage gains, that makes the difference between households gaining or losing ground.

In fact, knowing what has happened to the price of gas is virtually all you need to know to figure out the inflation rate. Since underlying core inflation is typically +0.1%, or 0.2%, a month, all you need to do is divide the percentage change in gas prices by 10 (or by 16 if you want to be more conservative) and add that to core inflation. Then you are almost always going to be within 0.1% of that month's non-seasonally adjusted inflation rate. Then all you need to do is make the seasonal adjustment.

We now know that the average price for gas in July was $3.59 vs. $3.62 in June (remember that June started at a high price and then declined). This is about a 0.7% decline, or less than 0.1% after we divide by 10. Adding in core inflation gives us roughly +0.1%. As you can see from the graph below of non-SA vs. SA inflation each month beginning last July, the seasonal adjustment is +0.1%:

(click to enlarge)

This gives us a July inflation rate of +0.2% +/-0.1% seasonally adjusted, or +2.0% year over year. So you should expect to read in a couple of weeks at a lot of sources that inflation is worryingly picking up steam. Don't buy it. Note that in August and September of last year there was a big run-up in the price of gas, and inflation clocked in at +0.5% each month. Unless gas prices run up to $3.90 or so a gallon, that isn't going to be duplicated. If gas prices remain stable, in two months we will be right back down at about +1.2% year-over-year inflation. Then we can switch right back to worrying about deflation.

Source: Consumer Prices Likely Up 0.2% In July