James Hamilton discusses the CPI numbers reported yesterday:
Core inflation
The Bureau of Labor Statistics reported yesterday 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 their 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 yesterday’s CPI numbers will cause the Fed to panic. Because yesterday’s news is already way of out of date.
