Inflation? Not in August, Thanks to the Drop in Gasoline Prices

September 17, 2014

by Doug Short

The Bureau of Labor Statistics released the August CPI data this morning. Year-over-year unadjusted Headline CPI came in at 1.70%, down from the previous month' 1.99%. Year-over-year Core CPI (ex Food and Energy) came in at 1.72% (rounded to 1.7%), down from the previous month's 1.86%. The non-seasonally adjusted month-over-month Headline number was negative at -0.17%, and the Core number was up a fractional 0.07%. On a seasonally-adjusted basis, the all items index posted its first contraction in 16 months. The decline in energy prices, most notably gasoline, was the key factor in the disinflationary August numbers. For more on that topic, see my latest weekly gasoline update.

Here is the introduction from the BLS summary, which leads with the seasonally adjusted data monthly data:

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.7 percent before seasonal adjustment.

The seasonally adjusted decline in the all items index was the first since April 2013. The indexes for food and shelter rose, but the increases were more than offset by declines in energy indexes, especially gasoline. The energy index fell 2.6 percent, with the gasoline index declining 4.1 percent and the indexes for natural gas and fuel oil also decreasing.

The index for all items less food and energy was unchanged in August; this was the first month since October 2010 that the index did not increase. While the shelter index increased and the indexes for new vehicles and for alcoholic beverages also rose, these advances were offset by declines in several indexes, including airline fares, recreation, household furnishings and operations, apparel, and used cars and trucks.

The all items index increased 1.7 percent over the last 12 months, a decline from the 2.0 percent figure for the 12 months ending July, and the smallest 12-month change since March. The index for all items less food and energy also rose 1.7 percent over the last 12 months. The food index has risen 2.7 percent over the span, while the energy index has increased 0.4 percent.   [More…]

Investing.com was looking for increases of 0.1% for Headline and 0.2% for Core CPI. Year-over-year forecasts were 1.9% for both Headline and Core.

The first chart is an overlay of Headline CPI and Core CPI (the latter excludes Food and Energy) since the turn of the century. I've highlighted 2 to 2.5 percent range, which the Federal Reserve currently targets for the CPI's cousin index, the BEA's Personal Consumptions Expenditures (PCE) price index.

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The next chart shows both series since 1957, which was the first time the government began tracking the core inflation metric.

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In the wake of the Great Recession, two percent has been the Fed's target for core inflation. However, at their December 2012 FOMC meeting, the inflation ceiling was raised to 2.5% while their accommodative measures (low Fed Funds Rate and quantitative easing) are in place.

Federal Reserve policy, which has historically focused on core inflation as measured by the core PCE Price Index, will see that the more familiar core CPI has reached the PCE the target range of 2 to 2.5 percent.

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