Core Inflation Higher in October
November 16, 2005
By Dean Baker
The core (excluding food and energy) inflation rate rose by 0.2 percent in October, following six consecutive months in which the core inflation rate was 0.1 percent or less. The overall inflation rate in the Consumer Price Index (CPI) was also 0.2 percent, as a 0.3 percent rise in food prices offset a 0.2 percent decline in energy prices. The October increase brings the annual rate in the core index over the last three months to 1.8, approximately the same as its 2.1 percent rate over the last year. The annual rate for the overall CPI over the last quarter was 8.0 percent, up sharply from the 4.3 percent rate over the last year.
Factors that pushed the core rate higher were a 0.5 percent rise in energy prices, a 0.5 percent jump in new vehicle prices, and a 3.5 percent surge in hotel prices. The rise in medical costs brings the annual rate of inflation in this component to 3.4 percent, suggesting that the price moderation of prior months may have been an aberration. The jump in vehicle prices was largely a reversal from the steep summer discounts. Similarly, the surge in hotel prices followed anomalous declines in the summer.
Rents continue to be a major factor holding down the core inflation rate. The owners' equivalent rent (OER) index (which excludes utilities, unlike the rent proper index) rose by just 0.1 percent for the second consecutive month. With record rental vacancies depressing rents, this component (which accounts for almost one-third of the core CPI) is likely to continue to be an important factor constraining inflation for some time. The OER index has risen at just a 1.7 percent annual rate over the last quarter.
Apparel and used car prices fell 0.4 percent and 0.6 percent, respectively. These components are likely to flatten in the months ahead, but there is no reason to expect a sharp reversal.
The Producer Price Index (PPI) continues to provide evidence of inflationary pressures at earlier stages of production. The overall finished goods index jumped 0.7 percent in October, driven by sharply higher energy prices. The index has now risen at a 13.2 percent annual rate over the quarter. The core finished goods index fell by 0.3 percent, reversing a 0.3 percent rise in September. However, the entire drop in October was attributable to sharp declines in car and truck prices (3.0 percent and 2.2 percent, respectively). These two components comprise 15 percent of the core index. This drop is virtually certain to be at least partially reversed in future months.
The intermediate and crude goods indexes showed substantial inflation in October. The overall intermediate goods index rose 3.0 percent while the crude goods index rose 6.7 percent. The core intermediate goods index rose by 1.2 percent for the second consecutive month. It has risen at a 9.8 percent annual rate over the quarter. The core crude goods index fell by 1.2 percent in October, but it has still risen at a 40.1 percent annual rate over the quarter.
The data in this report, along with the more rapid wage growth in the employment report, suggest that inflation is creeping higher. It was virtually inevitable that at least some of the energy price increases of the last two years would eventually show up in the core inflation rate. The weakness of the labor market has forced workers to absorb higher energy costs, however a stronger labor market is creating a situation in which workers may be able to regain some of the ground they lost. The wage data in the October employment report indicated that this is finally happening. While this might be good news for workers, it will lead to a higher rate of inflation, which may spark a strong reaction from the bond markets and the Fed.
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.
CEPR’s Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and producer price indexes.