One day after the Fed announced a new program of quantitative easing (QE3), the BLS reported that headline inflation spiked to an annual rate of 7.44 percent in August. Does that mean that QE3 was a mistake?

Superficially, it might seem so. After all, the announced justification for QE3 was that both parts of the Feds dual mandateunemployment and inflationhave been running well below target. If one of them, inflation, is now above target, that could be taken as a sign for cautious watching and waiting, not a bold new program of monetary stimulus. But not so fast.

A closer look at the data shows that almost all the uptick in the CPI came from a sharp increase in the price of gasoline, 9 percent in the month of August alone. There is nothing good about that. It is bad for families struggling to get by and bad for the economy because it cuts into the disposable income available for other expenditures. Still, the increase in gasoline prices has little relevance for monetary policy, which has no power over Middle East politics, refinery closings, and other factors that determine short-run movements in energy prices.

The inflation numbers that are relevant to monetary policy showed much less movement in August. Core inflation, which excludes food and energy prices, ran at just a 0.6 percent annual rate, down from an already low 1.09 percent in July. The 16 percent trimmed mean inflation measure from the Cleveland Fed, another popular measure of underlying inflation, was up slightly from July, but still came in at just a 2 percent annual rate for August.

Because monetary policy acts over a time frame of many months, some economists consider year-on-year inflation to be more relevant to policymaking than annualized monthly data. The year-on-year inflation rates for August 2011 to August 2012 were all well below the Feds 2 percent inflation target: 1.69% for the headline all-items CPI, 1.91 for the core CPI, and 1.87 for the trimmed-mean CPI.

The bottom line: Yes, it is superficially embarrassing to see the headline CPI leap upward just as the Fed declares inflation to be so low that it sees a need for extraordinary measures to get the economy moving. However, underlying inflation appears still to be running well below target. The same can be said for nominal GDP, which grew by just 3.3 percent in Q2, far short of its long-term trend of 4.5 percent or so. We do not know if QE3 will do much to get the economy moving again, but nothing in the latest data should give the Fed any grounds for second thoughts.

Follow this link to view or download a brief slideshow with charts of all the latest inflation data.