South-Western College Publishing - Economics  
June was Jumpin' for Consumer Prices
Topic Employment, Unemployment, and Inflation
Key Words Inflation, Consumer Price Index, and Core Consumer Price Index
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Reference ID: A148388085

News Story The core Consumer Price Index, a closely watched barometer of price inflation, grew at a relatively strong rate in June. The U.S. Labor Department's report on inflation showed that the core rate-which excludes the more volatile food and energy sector prices--increased by 0.3 percent in June for its fourth consecutive monthly increase. The core rate is thus a less volatile measure and the one preferred by Fed chairman Bernanke and the policy making staff at the Fed.

The June 2006 reading was 2.6 percent greater than in June of 2005 and represented the biggest year-to-year jump since 2002. This new report has caused some analysts to wonder just what the Fed will do in terms of monetary policy.

"The reality is that inflation continues to accelerate," Naroff Economic Advisors chief economist Joel L. Naroff wrote in a recent report. "Excluding energy, retail costs rose at a pace that cannot make anyone on the F.O.M.C. comfortable," he said, referring to the Federal Open Market Committee, the Fed group that sets interest rates.

"What this suggests is a broad -based rise in core inflation, and this has been happening over the past several months." said Barclay's Capital chief U.S. economist Dean Maki. "This is the trend."

Fed chairman Bernanke does not seem moved by the report. In testimony on Capitol Hill before the Senate Banking Committee, Bernanke gave a less threatening characterization of inflation, indicating that the previous tightening by the Fed had yet to be fully realized. Bernanke's remarks leave analysts wondering if, when the Fed meets in August, they will approve the 18th consecutive increase in interest rates.

Discussion Questions:
1. Use any source available to identify the make up of the F.O.M.C. Why does the F.O.M.C. seems to favor one Fed district above all of the others?
2. Discuss the differences between the Consumer Price Index and the core Consumer Price Index.
Multiple Choice/True False Questions:
1. The F.O.M.C. referred to in the article is the committee that adopts monetary policy in the Fed.
  1. True
  2. False
2. The core Consumer Price Index excludes volatile housing and energy cost from the inflation calculation.
  1. True
  2. False
Source Jeremy W. Peters, "Housing Costs Pushed Consumer Prices Up in June", The New York Times. July 20, 2006.
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