October's Consumer Price Index was released Thursday and showed a 3.5 percent increase in the cost of living since October 2006. The report also showed a core inflation rate of 2.2 percent. The "core CPI" is a smaller part of the overall CPI.
The math is the same, but it specifically excludes cost changes in energy products and food products because these two elements can be highly volatile.
When tracking inflation, therefore, economists tend to focus on core CPI instead of "regular" CPI.
Both are important -- Core for long-terms trends, and total for short-term consumer sentiment.
Inflation makes life more expensive and with more money spent to live, there's less money for savings and/or discretionary spending, and that slows down the economy.
USA Today ran a terrific quote from an accountant in San Diego on this topic:
"Have I been hit by rising energy prices? Hello! I live in the San Diego area, and I'm paying $3.41 a gallon," says Tage Woehl, an accountant. "On a 15-gallon tank, I'm spending over $50 per week. I find coupons when I can to eat, and seriously look at sales, because I'm spending a chunk more dough for gas than before."
And so, as we forge ahead towards the approaching Black Friday, the rate of inflation becomes very important to the U.S. economy. If consumers are feeling pinched, it's expected that they'll spend less, thereby slowing down the economy faster than was expected.
For home buyers and home sellers alike, this is bad news.
For buyers, mortgage rates may increase because the dollar should weaken; and, for sellers, homes may sit on the market longer because fewer buyers will qualify for mortgage loans at higher rates.
Source
TIPS, I-Bonds can help defang the inflation dragon
John Wagonner
USA Today, November 16, 2007
http://www.usatoday.com/money/perfi/columnist/waggon/2007-11-15-tips-treasuries_N.htm
