June Inflation Soared 9.1 Percent Amid Spiking Gas Prices

EconEye Admin

4 years ago

Inflation soared to 9.1 percent in June. Driving the stunning jump was the energy index, which contributed nearly half of the overall increase in inflation.—washingtonpost.com

Answer the following questions to check your understanding of the story.

What is the distinction between the inflation rate and a jump in the price of energy?

The inflation rate is the ______________, and a jump in the price of energy is _______________.

a) change in the relative price of all goods in the CPI basket; a change in the relative price of energy

b) increase in the price level; the increase in gasoline and home energy prices

c) rate at which all prices are rising; the percentage change in the inflation rate due to rising energy prices

d) rate at which prices on average are rising; a change in the relative price of energy

Wrong! - Does the inflation rate tell us how prices on average are changing or how the prices of all goods are changing? Does a jump in the price of energy tell us the percentage change in the inflation rate due to energy prices, or is the jump in the price of energy a change in the relative price of energy?

Fantastic! - The inflation rate is the percentage change in the average level of prices. A jump in the price of energy is a rise in the price of energy in terms of the prices of other goods and services—a change in a relative price.

Is the price of energy driving inflation or is inflation driving the price of energy?

a) Inflation is driving the price of energy because as expected inflation increases, the prices of all goods, including energy, rise.

b) The price of energy is driving inflation because the war in Ukraine is decreasing world oil supplies.

c) The price of energy is driving inflation because energy has a large weight in the CPI basket, and energy is needed to produce many other goods and services.

d) Inflation is driving the price of energy because energy producers are raising prices to combat rising costs.

Wrong! - What is the reason for rising energy prices? Do energy prices rise because inflation has soared? How is the inflation rate calculated?

Good Job! - Items in the CPI basket are weighted according to their relative importance in an average urban household. A large proportion of household income is allocated to energy, so energy has a large weight in the CPI basket, and its rising price has a significant influence on the inflation rate calculation. Rising energy prices are also influencing the prices of many other goods in the CPI basket.

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