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The August 2023 Consumer Price Index

Inflation rates in the United States saw an uptick in August, with the Consumer Price Index (CPI) registering a 0.6 percent increase for the month and a 3.7 percent rise over the past year. These figures represent a noticeable increase compared to recent inflation reports and are primarily attributed to the surge in retail gasoline prices during August. Gasoline prices soared by 10.6 percent within the month, making a substantial contribution of 34 basis points to the overall monthly CPI, accounting for more than half of the 0.6 percent increase. Over the past year, gasoline prices have shown a decrease of 3.3 percent.

The volatility of gasoline prices stands out as a crucial factor to consider. Monthly changes in gasoline prices have exhibited a standard deviation of 5.7 percentage points from 2000 to 2019, illustrating their highly unpredictable nature. In contrast, the standard deviation for the overall CPI, excluding energy, was only 0.1 percentage point over the same period.

To further highlight this volatility, a comparison between gasoline and apparel, two components of the CPI basket with similar weightings, demonstrates the stark difference. Gasoline, constituting approximately 3.4 percent of the CPI basket, is significantly more volatile than apparel, which makes up around 2.5 percent. This heightened volatility serves as a reason why economists often exclude gasoline and other energy components when calculating “core” inflation, which also excludes food due to its volatility, albeit generally less so than energy.

In August, core inflation, excluding volatile energy and food prices, increased by 0.3 percent, slightly exceeding expectations of a 0.2 percent rise. Over the past three months, core CPI has witnessed an annualized increase of 2.4 percent, marking a decline from the 5.0 percent recorded during the previous three-month period. This is also the lowest rate since March 2021.

The deceleration of core inflation is viewed as positive news, as it provides a better reflection of the enduring, underlying inflation trend. However, even core inflation remains susceptible to the influence of energy prices. The recent uptick in core inflation between July and August can largely be attributed to a notable increase in airfare inflation, with airfares being one of the core components most sensitive to energy prices.

While gasoline and food prices are highly visible and significantly impact household budgets, the Council of Economic Advisers (CEA) continues to closely monitor these volatile elements of the CPI, along with the overall inflation trend, in forthcoming reports.

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