Fluctuations in the price of motor fuel (mainly gasoline) have caused most of the monthly noise and year-over-year fluctuations of headline CPI inflation over the past four years.Inflation (Finance) ; Petroleum products - Prices

William T. Gavin

English

Research Papers in Economics

Economic SYNOPSES
short essays and reports on the economic issues of the day
2011 ■ Number 13
T
he Bureau of Labor Statistics (BLS) reports two main
consumer price index (CPI) inflation indicators: 
a headline index, which includes all items in the
consumer’s shopping basket, and another index that includes
all items except food and energy (core inflation). The head-
line index was designed to track changes in the average
price of goods and services purchased by consumers. Head  -
line indexes are commonly used to measure changes in the
cost of living, particularly for use in escalating wages, pen-
sion benefits, and other contracts. For example, Social
Security benefits, government bonds, and portions of the
U.S. tax code are indexed using the headline CPI. The core
CPI measure reduces variability in monthly data by elimi-
nating the components that are “noisy” (energy is, food
was quite volatile in the early 1970s when the concept of
core inflation was first introduced, but actually was one of
the least volatile components since 1980).
Although food and energy prices have moved
in the same direction recently, partially due to the
increased use of grains in energy production, fluc-
tuations in the price of motor fuel (mainly gaso-
line) have caused most of the monthly noise and
year-over-year fluctuations of headline CPI infla-
tion over the past four years. Motor fuel is just one
category in the energy component—the others are
gas (piped), electricity, fuel oil, and other fuels—
but motor fuel is a special case, as the chart shows.
The chart plots three series: (i) headline CPI,
(ii) the standard measure of core CPI (which
excludes food and energy), and (iii) the CPI exclud-
ing just motor fuel. The plots for core CPI and the
CPI excluding motor fuel look very similar. A gap
of about 1 percentage point opened up briefly in
the second half of 2008, but the gap is small com-
pared with gaps using headline CPI. Motor fuel
prices have been so volatile that they strongly
influence overall headline CPI inflation despite
their small weight in the overall index—averaging
about 4.7 percent during the past 4 years.
From January 2007 through January 2011, the standard
deviation (SD) of monthly changes in headline inflation
was 5.2 percent at an annual rate. As noted in the past,
excluding food does not make measured inflation less
volatile.1 Excluding just food, the SD of the monthly CPI
inflation actually rises to 6.0 percent at an annual rate. In
contrast, if one excludes only motor fuel, the SD of monthly
inflation falls to 2.0 percent at an annual rate.
CPI Inflation: Running on Motor Fuel
William T. Gavin, Vice President and Economist
Fluctuations in the price of motor fuel
(mainly gasoline) have caused most of
the monthly noise and year-over-year
fluctuations of headline CPI inflation
over the past four years. 
–3
–2
–1
0
1
2
3
4
5
6
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
Year-Over-Year Percent Change
CPI Inflation: Running on Motor Fuel
Core CPI
CPI Excluding Motor Fuel
Headline CPI
NOTE:  I thank Brent H. Meyer of the Federal Reserve Bank of Cleveland for sending 
the disaggregated data used to compute the CPI excluding motor fuel. 
See www.clevelandfed.org/research/data/us-inflation/mcpi.cfm.The data shown in the chart are 12-month moving
averages, to further filter the noise from monthly inflation
rates. Year-over-year changes should not be considered
noise. They may be temporary, and, in general, the Fed
does not want to overreact to transitory factors that tend
to be self-correcting. The problem, of course, is estimating
which factors will or will not self-correct over the relevant
horizon. Recent year-over-year fluctuations in the CPI due
to motor fuel are persistent. Over the past 4 years, the aver-
age annual inflation rate in the CPI has been 0.3 percentage
points higher than the CPI excluding motor fuel. ■
1 See Gavin, William T. and Mandal, Rachel. “Predicting Inflation: Food for
Thought.” Federal Reserve Bank of St. Louis, Regional Economist, January 2002,
pp. 5-9; http://research.stlouisfed.org/publications/regional/02/01/Inflation.pdf.
Economic SYNOPSES Federal Reserve Bank of St. Louis      2
research.stlouisfed.org
Posted on May 11, 2011
Views expressed do not necessarily reflect official positions of the Federal Reserve System.

CPI inflation: running on motor fuel

http://research.stlouisfed.org/publications/es/11/ES1113.pdf

CPI inflation: running on motor fuel

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