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By New_Deal_democrat February 13, 2014 7:54 am
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(Relatively) cheap gas bringing lowest inflation rate siince the Great Recession
Since the middle of last year I have been using the change in the price of a gallon of gas to forecast that month's CPI in advance. My point has been, that all you really need to know about inflation is the price of gasoline. So far with one exception each forecast has turned out to be within 0.1% of the actual number.

With all of January's and half of February's weekly  E.I.A. reports published, we can estimate October's inflation rate now. Further, we can at least discuss where February's CPI may be as well.

My method is to take the change in the price of a gallon of gas and divide by ten, then add 0.1% to 0.2% to account for core inflation, or else divide by 16 to be more conservative, to arrive at the non-seasonally adjusted inflation rate.

The result of this calculation is that it is quite possible that Year over Year prices right now have actually declined slightly.

In December the average price of a gallon of gas was $3.27.6  For January it was $3.31.3.   This month so far it is $3.30.1. That is a +0.2% increase for January and a -0.4% decline for the first two of four reported weeks in February. For both months, dividing by 10 or 16 makes the result slightly negative but basically unchanged m/m, and adding 0.1% to 0.2% gives us a rounded result closest +0.1% each month, non seasaonally adjusted.

The seasonal adjustment for January last year was -0.2%.  For February it was -0.1%.  This gives us a final seasonally adjusted inflation rate that rounds to -0.1% for January and 0.0% for February.

These readings will replace 2013's January and February readings of unchanged and +0.7%, respectively.  From February through December 2013 the inflation rate was only +0.8%.  When we add in January and February 2014 so far, we get a YoY rate from February 2013 of +0.7%.

Since my number one concern is jobs and income, it's worth noting that this means real YoY wages have increased by about 1.5% since one year ago, the best increase since 2010:

This also means that real median wages in February are probably only about 1% below their 2009 peak.

Of course, in the last week as refiners began switching over to their spring/summer blends, prices have started to increase significantly.  The analysis in this piece assumes that the price increases in the second half of this month will be no worse than price increases at this same time last year.


We'll know in about 4 weeks, but the bottom line is, we are probably experiencing the most subdued inflation rate since the Great Recession.

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