Falling Energy Prices Push CPI Lower in March
By Dean Baker
April 15, 2009
Hotel prices are plunging due to overcapacity.
A 3.0 percent drop in energy prices pushed the overall consumer price index down by 0.1 percent in March. The core index rose by 0.2 percent for the third consecutive month. The overall CPI has risen at a 2.2 percent annual rate over the last quarter, compared with a 0.4 percent decline over the last year. The core index has risen at a 2.2 percent annual rate over the last quarter, up slightly from a 1.8 percent rate over the last year.
Among the factors pushing the inflation rate higher in March was an 11.0 percent jump in tobacco prices, the result of new taxes, and a 0.6 percent rise in new car prices. Over the last quarter, tobacco prices have risen at a 61.2 percent annual rate. New car prices have risen at a 7.0 percent rate. The increase in car prices is most likely an issue of seasonal pricing policy; car prices had fallen at a 4.7 percent annual rate over the prior six months.
Owners equivalent rent and rent proper both rose 0.2 percent in March. Over the last quarter, they rose at a 2.5 percent and 2.6 percent annual rate, respectively. The rental components, which together account for more than 40 percent of the core index, will tend to keep the core inflation rate steady. It is important to remember that the index measures all rents, not just rents in units turning over. The former will typically show much more inertia than the latter.
By contrast, hotel prices are plunging. They fell 2.4 percent in March, bringing their annual rate of decline over the quarter to 19.1 percent. This is the result of the enormous overbuilding in the sector.
Health care costs moderated slightly, increasing by just 0.2 percent in March. They have increased at a 4.0 rate over the quarter. Education costs rose by 0.5 percent in March; they have risen at a 5.0 percent annual rate over the quarter. These sectors will continue to be sources of inflationary pressure, especially as state and local governments reduce their payments and subsidies.
The picture at earlier stages of production is quite mixed. At the intermediate and crude goods levels, prices are falling rapidly in both the overall and core indexes. The overall intermediate goods index fell 1.5 percent in March, while the core index fell by 0.3 percent. It was the 8th consecutive monthly decline for the overall index and the 6th consecutive month of decline for the core index. The overall index has fallen at an 11.7 percent annual rate over the last quarter, while the core index has declined at a 7.7 percent rate.
The overall crude goods index fell by 0.3 percent in March, the 8th consecutive month of decline. The core index fell by 1.6 percent. Over the last quarter, the overall and core indexes have declined at a 27.2 percent annual rate and 0.4 percent rate, respectively.
In spite of the price declines at crude and intermediate goods level, there is still modest inflation at the finished goods level. The overall index fell by 1.2 percent in March, but the overall index was flat following two months of modest increases. Over the last quarter, the overall index has fallen at a 0.9 percent annual rate, but the core consumer goods index has risen at a 3.4 percent annual rate.
There are some peculiar sources for the inflation at the finished goods level. Newspaper prices have risen at an 8.4 percent annual rate over the last three months, while book prices have risen at a 5.0 percent rate. These price increases come in the face of falling demand. Tobacco prices have risen at a 25.3 percent annual rate, presumably the result of higher taxes. This indicates that, in spite of the strong downward price pressure at earlier stages of production, there is still some upward pressure at the finished goods level.
The overall trend in prices seems reasonably stable. At current rates of inflation, real wages are still rising. Also, it does not appear that there is a realistic fear of spiraling deflation at this point.