The inflation rate is an important economic indicator. It tells you how fast prices are changing in the economy. It's measured by the Consumer Price Index, or CPI. Moderate inflation is actually good for economic growth. When consumers expect prices to rise, they are more likely to buy now, rather than wait. This increases demand.
Therefore, the Federal Reserve sets a target rate of 2% once the volatile effects of gas, food and oil prices are stripped out. This is known as the core inflation rate. Watching the inflation rate from month to month will help you determine where the economy is in the business cycle.
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In March, falling fuel oil prices were offset by moderate price increases across the board. Despite this strength, it didn't exactly show the strong demand needed to boost hiring.
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February was a repeat of January. A 4.7% increase in home heating oil prices was offset by declines elsewhere. Monthly inflation was just .1%, while the year over year core inflation rate was just 1.6%, well below the Fed's target.
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Brutal winter storms pummeled the nation, driving home heating oil prices up 3.7%. Natural gas prices rose nearly as much (3.6%). Fortunately, these price jumps were offset by drops in gasoline, new cars and trucks and apparel. As a result, inflation rose a scant .1% overall.
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Inflation rose .3%, the most in six months, creating fears of hyperinflation. Goldbugs caused a rally in the precious metal as a hedge. Many are concerned that the Fed's Quantitative Easing will drive quickly rising prices like that seen during the Weimar Republic in German. However, the core inflation rate was only up 1.7%, below the Fed's target.
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Prices rose exactly zero in November, keeping inflation at just 1.2% for the year, thanks to a drop in gas prices. However, it doesn't measure stock and bond prices, which rose record levels this year.
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Instead of inflation, there was mild deflation thanks to a 2.9% drop in gas prices. Although deflation is a threat, this won't be permanent. Gas prices normally decline in the fall, and rise in the spring. Second, the core inflation rate (without these volatile gas and food prices) was 1.7%, below the Fed's 2% target.
Rising stock prices are not measured in the CPI report. (Credit: Spencer Platt/Getty Images)
Prices rose .2% in September, and were only up 1.2% for the year. However, low interest rates could be causing an asset bubble in stock and bond prices (which rise when yields drop.) This doesn't show up in the Consumer Price Index report, so the Federal Reserve may miss the warning signals. The same thing happened in 2006, when the Fed missed the asset bubble in housing, for the same reason. The CPI doesn't measure housing prices, they measure the cost of rent as an equivalent.
A brief rise in interest rates didn't slow housing in August. (Credit: Justin Sullivan/Getty Images)
Many people were worried that higher interest rates since May would suppress the reviving housing market. However, housing prices rose .2% in August, and 2.4% in the last 12 months. Keep in mind, the BLS reports on rent prices as a proxy for housing prices. This means it can miss some extreme jumps in price if rentals don't keep up with housing prices. This happened in 2005, which is one reason analysts missed that asset bubble. Otherwise, inflation remained mild in August, as overall prices rose just .1% for the month, and 1.5% since August 2012. The core inflation rate was 1.8%, below the Fed's target rate.
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The costs for medications, medical equipment and supplies are .1% lower than last year. That's better than overall prices, which rose 2% in the last year, and .2% in the last month. Gas prices are a 5.2% higher than last year, and rose 1% in July. However, the core inflation rate is just 1.7%.
Gas prices are rising earlier this summer. (Photo: Mark Renders/Getty Images)
Gas prices spiked up 6.3% in June, after falling since February. Overall inflation was .5% during the month. When compared to last year, inflation was 1.8%, again because of gas prices. The core inflation rate, which leaves out energy and food prices, was 1.6%. This was well below the Federal Reserve's 2% target.