The Consumer Price Index for all items purchased by U.S. urban consumers rose at a seasonally adjusted annual rate of 4.6 percent in August, somewhat slower than the July rate of 6.2%. Gasoline and food prices added significantly to inflation in August, as in the previous month.
Food and energy prices are highly volatile and account for much of the month-to month variation in the CPI. Their effect can be removed by taking the food and energy components out of the CPI. The result, called the core inflation rate, was 2.97 in August, slightly faster than in July.
Another way to remove volatility from the CPI series is the 16 percent trimmed mean CPI published by the Cleveland Fed. That index removes the 8 percent of prices that increase most and the 8 percent that increase least each month, whether they are energy, food, or something else. In July trimmed-mean inflation rose slightly. At 3.6 percent, it remained slightly above core inflation, as it has for most of the year.
There is no "right" and "wrong" way to measure inflation. Each index answers a somewhat different question. Economists often look at the core or trimmed mean measures to judge the effects of monetary policy. The all-items CPI includes food and energy prices that are set in global markets, beyond direct control of domestic policy.
Although inflation is beginning to rise, it is not yet a great cause for concern. The Fed does not set an explicit target rate for inflation, but it tends to view 2 percent inflation as consistent with prudent monetary policy in the long run. After slowing to a crawl during the recession, headline inflation is now running about 3 percent on a year-on-year basis, while core measures have not yet reached the 2 percent threshold.
Follow this link to view or download a set of classroom-ready slides with graphical presentation of inflation data.