The document summarizes inflation data from the August 2012 Consumer Price Index report. It notes that while headline inflation spiked to 7.44% due to a rise in gasoline prices, core inflation fell to 0.6%. The trimmed mean inflation rate also remained low at 2%. The document discusses how economists look at various inflation measures and the Federal Reserve's 2% inflation target when making monetary policy decisions like quantitative easing.

1. Data for the Classroom from
Ed Dolan’s Econ Blog
http://dolanecon.blogspot.com/
Gasoline Pushes CPI
Inflation Higher in August
but Core Inflation Falls
Posted Sept. 15, 2012
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2. Headline Inflation Spikes Sharply in August
 The all-items consumer price index
rose at an annual rate of 7.44% in
August, the highest monthly rate of
inflation in over three years.
 It was the first time since March that
headline inflation had exceeded an
annual rate of 1%
 Nearly all of the increase was
attributable to a jump in gasoline
prices, which jumped by 9% in the
month of August alone. The year-on-
year change in gasoline prices was
just 1.8%
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

3. Core Inflation Fell in August
 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 rate of core inflation for
August, stated as an annual rate, was
0.6%, about half of the July rate.
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

4. Trimmed Mean Inflation Also Remains Low
 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
slowed to an annual rate of 2 percent
in August
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

5. 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
to judge the effect of monetary policy
on underlying inflationary trends
 The Fed considers inflation of about
2 percent to be consistent with
prudent monetary policy.
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

6. The Longer Term Trend
 To see longer term trends in
inflation, it is useful to look at year-
on-year changes, which compare
each month’s price level with that of
the same month in the year before
 All y-o-y measures of inflation rates
slowed during the global
recession, then rose again for most
of 2011.
 The three measures shown here
have moved steadily downward in
2012. All now below the Fed’s 2
percent target
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

7. Inflation and Quantitative Easing
 At its September 2012 meeting, the
Federal Open Market Committee of the
Federal Reserve System voted to
undertake a new round of expansionary
monetary policy, known as quantitative
easing.
 The Fed made that decision on the
basis of low rates of inflation for core
measures and related data from the
GDP accounts
 The Fed’s decision came before the
August CPI figures came out, but it is
unlikely it would have been influenced
by the one-month spike in headline
inflation
Posted Sept. 15, 2012 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com