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Two Measures of Inflation with a Footnote on Gasoline

May 15, 2011

Note from dshort: I’ve now update the charts below with the latest Consumer Price Index data from the Bureau of Labor Statistics. The annualized rate of change is calculated to two decimal places for more precision in the side-by-side comparison.

As the charts below illustrate, core CPI and core PCE are both below the Federal Reserve’s 2% target, generally referenced as a 1.75%-2% range.

The October 2010 core CPI of 0.61% was the lowest ever recorded, and two months later the core PCE of 0.73% was an all-time low. However we’re seeing a significant divergence between the headline and core numbers for both indicators, especially the CPI. Food prices are on the rise, but it is the energy component — gasoline prices in particular — that is driving the spread wider. Posted Image

The Bureau of Labor Statistic’s Consumer Price Index and The Bureau of Economic Analysis’s monthly Personal Income and Outlays report are the main indicators for price trends in the US. The chart below is an overlay of core CPI and core PCE since 2000.

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Here is a long-term perspective from the actual beginnings of the two series.

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For some technical data explaining the differences between the two, see this comparison article from the BEA.

In the real world we can’t exclude food and energy from our monthly expenses. But the extreme volatility of these two expense categories, especially energy, often obscures the underlying trend, which is the focus of the chart above. For evidence of the volatility, see this overlay of headline and core CPI and this one of headline and core PCE.

Hostitility Toward Government Inflation Analysis

One the other hand, the volatile price of gasoline explains why so many people are angered by the exclusion of food and energy from core measures of inflation. The chart of gasoline prices below is from the latest Energy Information Administration data. As I type this, lists twelve states and the District of Columbia with an average price of regular above $4.00. They are Wisconsin, Washington, Rhode Island, Indiana, Michigan, West Virginia, New York, California, Alaska, Connecticut, Illinois, and Hawaii.

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I’ll update these charts again when the next Personal Consumption Expenditures news release is posted on May 27.

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