US Inflation Data: Headline CPI Inflation Slows, Core Inflation UP a Bit in August

Data for the Classroom from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ US Inflation Data: Headline CPI Inflation Slows, Core Inflation Up a Bit in August Posted September 16, 2011 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 CPI Inflation Slows Slightly in August
The inflation number most likely to make headlines is the monthly change in the Consumer Price Index for all items purchased by urban consumers
The all-items CPI rose at a seasonally adjusted annual rate of 4.6% in August, 2011, down a bit from the July rate of 6.2%
Gasoline and food prices contributed to inflation in August, as in the previous month.
Posted September 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

Core Inflation was Slightly Higher in August
Food and energy prices are highly volatile and account for much of the month-to-month variation in the CPI
Their effect can be removed by taking the food and energy components out of the CPI
The result is called the core inflation rate
Because food and energy prices contributed relatively less to inflation in August than in July, core inflation rose just a bit.

The “Trimmed Mean” CPI
Another way to remove volatility from the CPI series is the “16% trimmed mean CPI” published by the Federal Reserve Bank of Cleveland
The trimmed mean CPI removes the 8% of prices that increase most and the 8% that increase least in each month, whether they are food, energy, or something else
In July, the trimmed mean inflation rose slightly and remained slightly more rapid than the core measure

Which Measure is Best?
The CPI for all items gives the most accurate picture of current changes in the cost of living for urban consumers
The core CPI and trimmed mean CPI give more accurate pictures of underlying trends
Economists at the Fed look closely at the core and trimmed mean CPIs to judge the effect of monetary policy
In contrast, the all-items CPI includes food and energy prices that are set on world markets, beyond direct control of monetary policy

The Longer Term Trend
To see longer term trends in inflation, it is useful to look at annual average inflation, not just month-to-month changes
All measures of inflation rates slowed during the global recession, but they are now rising again
The Fed considers 2% annual inflation to be consistent with prudent monetary policy in the long run

US Inflation Data: Headline CPI Inflation Slows, Core Inflation UP a Bit in August

by Ed Dolan on Sep 16, 2011

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US Inflation Data: Headline CPI Inflation Slows, Core Inflation UP a Bit in August — Presentation Transcript