How Concerned Should We Be About Core Inflation?

The Bureau of Labor Statistics reported Thursday that its primary consumer price index CPI-U rose 5.6% over the last year. That's the highest inflation rate in 17 years, the newspapers all call to our attention. Just how concerned should we be about these numbers?

Of that 5.6% year-over-year price increase, 1.9% came within the last two months alone. And there's no question that the big story driving that 2-month increase has been energy prices. NewJerseyGasPrices.com reports that the average retail price of gasoline sold in the United States rose from about $3.78/gallon in the middle of May to $4.12 in mid-July, a 9% increase. That's in line with the 10.6% 2-month increase that BLS reported in its seasonally adjusted consumer energy price index between May and July. Energy prices have a weight near 10% in the total CPI. That means that if energy prices had held constant between May and July but all other price increases had been the same, the year-over-year CPI number would have been more like 4-1/2% rather than 5-1/2%.

But does it make any sense to ask, What if energy prices hadn't gone up between May and July? There are certainly good reasons why the Fed should not be taking as much comfort in "core inflation" as it has in recent years. But in this case, there is a clear need to net out the May-to-July energy price increase-- it's already been reversed. The US national average gas price is back to $3.78/gallon, right where it was in mid-May. Thus, even without any further drop in the price of gasoline-- and personally, I do expect further drops-- the 4-1/2% number is a better summary of where we stand right at the moment than 5-1/2%.

So no, I don't think that Thursday's CPI numbers will cause the Fed to panic. Because Thursday's news is already way of out of date.

Comments

[CLH:]

Yes you are right. Thursdays mumbers were nothing to worry about. (the market went up not down).

2008 Aug 17 06:52 AM

[pjanoski@rc...:]

Hamilton's article on core inflation says nothing.

What happens if Oil suddenly rises back to where it was (after the September COLA increase is set) prior to the mysterious drop?

I think that Greenspan and his crew that created the totally rediculous concept of the "core" inflation should be charged with creating a way to unjustifiably short change the retirees (in a vailed attempt to reduce the Governments committment to these retirees).

Much better that we stop pissing away billions in the Middle East if we need a way to achieve the promises to Americas retirees.

Paul J.

2008 Aug 17 08:17 PM

[User 143167:]

The author needs to look at the seasonal factors that the BLS uses this year. Even with oil price keeps going down toward $100, the inflation data will get WORSE in the next a few months.
Well, you know the BLS models never reflect the fact. It should not be a surprise.

2008 Aug 17 11:15 PM

[moneysurf:]

Well current uncertainities in the socio-economic scenario of the world should also be kept in mind.

2008 Aug 18 11:12 AM