Should We Be Concerned About June’s Sharp Jump In Inflation?

U.S. consumer price inflation jumped to a seasonally adjusted annual rate of over 5.9 percent in June, according data released today by the Bureau of Labor Statistics. That was up from an inflation rate of just 1.8 percent in May. In March and April, the CPI actually decreased. How much do we need to worry about the sharp increase in inflation, or the increasing volatility of inflation over the past year, both of which are evident in the following chart? Here are some points to consider.

First, the jump in the monthly inflation rate and the volatility of recent months are almost completely due to ups and downs in the seasonally adjusted price of gasoline. It rose 6.1 percent in the month of June alone after no change in May and decreases of 8.1 percent in April and 4.4 percent in March (all monthly changes, not annualized). The price of gasoline is notoriously volatile. It depends not only on world oil prices, but also on the dynamics of domestic refining and on driving habits.

Other energy and food prices are also volatile, although not quite so much so. If we strip food and energy out of the CPI, we get the seasonally adjusted core CPI, which varies much less from month to month, as the next chart shows.

Second, the price of gasoline really did not increase much in June. The reported seasonally adjusted price rise for June was 6.3 percent, but in reality, the price at the pump went up by only 0.6 percent. Seasonal adjustments depend on what usually happens to the price of a good in a given month. Usually, the price of gasoline rises in the spring, with the rate of increase peaking in May. The price then usually falls a bit in June. This year, for some reason, the usual June decrease in the unadjusted gasoline price did not occur. Instead, the seasonal adjustment factor made the failure of gasoline prices to fall look like a sharp increase. Gasoline has a large weight in the CPI, accounting for 5.6 of all consumer expenditures, so the misdirected seasonal adjustment skewed the whole CPI upward.

As we see in the following graph, the seasonally adjusted CPI is usually less volatile than the nonadjusted version—that is the whole reason for seasonal adjustment in the first place. However, in June, the rise in the adjusted version was considerably more than that of its unadjusted counterpart.

We can filter out both the volatility of monthly data and the quirks of the seasonal adjustment process by looking at year-on-year changes in the CPI. The following chart shows changes in both the all-items and core CPI for each month relative to the same month of the previous year. As the chart shows, inflation by both measures has been trending downward over the past couple of years. Both are now well below the Fed’s announced 2 percent inflation target.

All things considered, then, there appears to be no objective reason for policymakers to worry about the anomalous jump in seasonally adjusted monthly CPI inflation for June. If anything, the Fed should be worrying that its policy is too tight and that it is holding inflation below its appropriate level.

That does not mean, though, that consumers will stop complaining about inflation. Consumers put very different subjective weights on price changes than those applied by the BLS. Consumers pay more attention to the prices of things that they buy frequently, like milk and gasoline, than on things they buy less often, like appliances or computer software. Furthermore, as behavioral economists remind us, they perceive losses from the increased prices of some goods more sharply than equivalent gains from decreased prices of other goods. As a result, for many if not most people, the perceived rate of inflation exceeds the measured rate of inflation. If you are among the many who think that inflation is still an imminent threat to our economy, I welcome your comments.

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