CPI Falls 0.7 Percent in December, Up 0.1 Percent for Year
January 16, 2009
By Dean Baker
Real wages rose at a 23.4 percent annual rate over the last three months.
The overall consumer price index fell by 0.7 percent in December, the third consecutive month of sharp declines. As in the prior two months, the main factor was a sharp decline in energy prices, which fell 8.3 percent last month. The core index also declined in December, falling 0.3 percent. Over the last quarter, the overall CPI has fallen at a 12.7 percent annual rate. The core index has fallen at a 0.3 percent annual rate during this period, compared with a 1.8 percent increase over the last year.
The sharp fall in prices over the last few months translates into a very rapid rate of real wage growth, since the rate of nominal wage growth has not been affected much by the downturn yet. Over the last three months, the average real hourly wage for production workers has increased at an incredible 23.4 percent annual rate. Over the last year, the average real hourly wage has risen by 4.5 percent.
Over the eight years of the Bush administration, the average real hourly wage increased by 7.1 percent, almost the exact same as the 7.3 percent increase over the eight years of the Clinton administration.
In addition to the sharp decline in energy prices, there were also sharp declines in the price of several core components. Hotel prices fell by 0.7 percent, new car prices fell by 0.4 percent, and used car prices fell by 0.8 percent. Over the last three months, the prices of these components have fallen at annual rates of 12.9 percent, 5.7 percent, and 19.5 percent.
These declines are being driven directly by oversupply. There was an enormous amount of hotel construction over the last two years. This increase, coupled with plunging demand, is leading to soaring vacancy rates. The collapse of car sales has received considerable attention. In addition to providing stiffer competition for new cars, the lower prices for used cars also mean that many people will lack the money necessary for a down payment on a new car purchase.
Medical care and education costs continued to rise at a moderate pace, with health care costs rising by 0.3 percent in December and education costs rising by 0.5 percent. Over the last three months, prices for these components have increased at a 2.8 percent and 5.2 percent annual rate, respectively.
Prices continue to fall sharply at earlier phases of production. The overall finished goods index fell by 1.9 percent in December. It has now dropped at a 24.3 percent annual rate over the last quarter. The core finished goods index rose by 0.2 percent, driven in part by a 1.2 percent rise in car prices. This index increased at a 2.9 percent rate over the last three months.
The core finished goods index is virtually the only index that is showing inflation at the producer level. The overall intermediate goods index fell 4.2 percent in December, while the core index dropped 3.0 percent. Over the last three months these indexes have declined at a 39.7 percent and 24.6 percent annual rate, respectively. The overall crude goods index fell by 5.3 percent while the core index fell 2.2 percent. Over the last quarter these indexes have declined at a 79.4 and 82.5 percent annual rate, respectively.
The rate of price decline in the producer price indexes is truly extraordinary. The sharp pace of price decline primarily reflects the collapse of commodity prices last fall, which is being passed on in later phases of production. It is likely that that these declines will slow or be partially reversed in the near future as the prices of some commodities, most notably oil, have fallen to levels where it is no longer profitable to continue production in many areas. If this happens, there will be some modest price pressure coming from commodities later in the 2009. There is also likely to be some modest price pressure later in the year if the dollar reverses some of its recent gains as financial markets settle down. For these reasons, concerns about deflation are likely exaggerated.