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Ed Dolan’s Econ Blog US Inflation Jumps in June. How Concerned Should We Be? July 16, 2013 Terms of Use: These slides are provided 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 Publishing.

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Consumer Price Inflation Jumps Sharply in June  The seasonally adjusted all-items U.S. consumer price index rose at a 5.9% annual rate in June, up from 1.8% in May.  The index had decreased in March and April.  Almost all of the variability in the CPI since the start of the year has come from energy prices, especially the price of gasoline. Energy prices have a weight of 9.5% in the CPI

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com The Role of Seasonal Adjustment  Seasonal adjustment played an unusual role in June  Usually, the NSA CPI is more volatile than the SA version  However, gasoline prices failed to fall in June, as they usually do. Seasonal adjustment turned an actual 0.6 percent increase in the price at the pump into an adjusted 6.3 percent increase, distorting the entire CPI for the month.

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Core Inflation Falls Below 2 Percent  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 annualized core inflation rate for March was just 1.94 percent, below the Fed’s 2 percent inflation target

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Trimmed Mean Inflation Rises Slightly  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 rose at a 2.21 percent annual rate in June, slightly faster than in May

Posted July 16, 2013 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, and at other inflation indicators derived from the GDP accounts, to judge the effect of monetary policy on underlying inflationary trends

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com Year-on-Year Inflation Continues Downward Trend  Still another way to remove the effects of both seasonal adjustment and month-to-month volatility is to look an year-on-year changes in the CPI  This chart shows the change in the CPI from the same month a year earlier  The trend of inflation has clearly been downward over the past two years

Posted July 16, 2013 on
Ed Dolan’s Econ Blog http://dolanecon.blogspot.com The Bottom Line  The bottom line is that June’s jump in the seasonally adjusted CPI is little cause for concern.  Measures of underlying inflation remain subdued. If anything, we should be concerned that the Fed is not pushing hard enough to maintain its 2 percent inflation target

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