Recently many commentators have worried that rising gasoline prices will derail the fragile recovery of the U.S. economy. The latest inflation report from the Bureau of Labor Statistics shows little sign that any such thing is happening yet.
The headline all-items CPI for urban consumers rose at a 3.54 percent annual rate in March, down from 5.03 percent in February. (I base these rates on the unrounded CPI data supplied by the Cleveland Fed and state monthly data as annual rates.)
There are two parts to the concern that gasoline prices could harm the recovery. One is direct: Higher gasoline prices leave less money in consumer pockets for spending on other goods and services. That was a definite concern in February, when the monthly increase in gasoline prices was a full 6 percent. The monthly rate slowed to 1.7 percent in March, still substantial but a little less alarming.
The other potential effect of higher gasoline prices is indirect: If higher gasoline prices start feeding through to cause inflation in other CPI components, then the Fed might feel a need to tighten monetary policy. That would pose a much more significant threat to the recovery.
Gasoline price could feed through to the broader CPI in one of two ways. First, gasoline itself is a cost for many firms, from delivery services to construction. Second, gasoline is an important component of the cost of living. In a tight labor market, a rising cost of living leads to higher wage demands, pushing up prices across the board. With as much slack as there still is in the U.S. labor market, that is less likely to happen.
To see whether rising gasoline prices are spilling over to the rest of the economy, we can consult various measures of underlying inflation. The best known of those is the core inflation number published by the BLS itself, which consists of the all-items CPI less food and energy. Core inflation for March came in at a 2.8 percent annual rate, up from 1.21 percent in February.
Another useful measure of underlying inflation is the 16 percent trimmed mean inflation rate from the Cleveland Fed. Instead of always subtracting food and energy from the CPI, the trimmed mean inflation rate subtracts the 8 percent of prices that increase most and the 8 percent that increase least each month, whatever they are. Trimmed mean CPI inflation for March was 2.67 percent, up from 1.33 percent in February.
The following chart shows all three measures, the all-items CPI, the core CPI, and the trimmed mean CPI. Two things stand out from the chart: First, underlying inflation, which is much less volatile than headline inflation, shows no discernible upward trend over recent months. Second, the three measures are converging, with the two measures of underlying inflation showing an unusual degree of agreement since the first of the year.
The bottom line: There is little evidence yet that rising gasoline prices are feeding through to broader inflation in a way that would choke of the recovery or justify a tightening of monetary policy. Of course, the chart shows only what has happened so far; it cannot forecast future events like a war that would close key oil routes. Such an event could change the picture quickly.
Follow this link to view or download a brief slideshow with charts of all the latest CPI data.