Higher Rents Drive Core Inflation in March
April 19, 2006
By Dean Baker
The core (excluding food and energy) Consumer Price Index (CPI) rose by 0.3 percent in March, its sharpest rise since a similar 0.3 percent increase in September of 2004. The March increase brings the annual rate of inflation in the core to 2.8 percent over the last quarter, compared to a 2.1 percent increase over the last year. The overall CPI increased by 0.4 percent in March, as energy prices jumped 1.3 percent. The annual rate of inflation in the overall CPI has been 4.3 percent in the last quarter, up from a 3.4 percent rate over the last year.
The rise in the core index was driven in large part by the 0.4 percent increases in the two rent components, which together account for almost 40 percent of the core index. The rent proper index had been rising somewhat more rapidly over the last year, in part due to increases in utility prices. The owners’ equivalent rent (OER) index, which excludes utilities, has also begun to rise more rapidly in recent months. The annual inflation rate in the OER over the last quarter has been 3.8 percent, up considerably from its 2.7 percent rate over the last year. This could be the result of some tightening in the rental market as people turn away from home buying in response to higher interest rates.
There were two noteworthy anomalies in the March CPI. The apparel index rose by 1.0 percent, but this followed a decline of 1.0 percent in February. This pattern reflects the difficulties of making seasonal adjustments in the index; apparel prices will probably continue to be flat or slightly falling in the near future. Apparel prices have risen at a 1.4 percent rate over the last quarter, compared to a decline of 1.2 percent over the last year.
The other anomaly was a 0.3 percent decline in the public transportation index. This is the second consecutive month of the decline. With airline prices clearly headed upward, and higher fuel costs putting pressure on most other forms of transportation as well, it seems virtually certain that these declines will be reversed in the months ahead. Public transportation prices have risen at a 2.9 percent rate over the last quarter, down from a 5.9 percent rate for the last year.
There continues to be evidence of inflationary pressure at earlier stages of production in the March price data. The core Producer Price Index (PPI) rose by just 0.1 percent in March, but the overall index was up by 0.5 percent, driven by a rise of 0.5 percent in food prices and 1.8 percent in energy prices. In spite of the low March figure, inflation in the core PPI is rising. The annual rate of inflation in the core over the last quarter has been 3.1 percent, and in the core consumer goods index it has been 3.2 percent. By comparison, inflation in the core index was just 1.0 percent in 2003.
The overall intermediate goods index fell by 0.1 percent, but the core index rose by 0.1 percent. The annual rate of inflation in the core index over the quarter was 6.7 percent. This compares to just a 2.1 percent rate in 2003. The overall crude goods index fell by 2.7 percent in March, driven by sharp declines in food and energy prices, but the core index increased by 0.8 percent. The core index has risen at 16.9 percent annual rate over the last quarter.
This report is consistent with the view that inflation is edging higher. There is growing evidence of inflationary pressures at earlier stages of production. If the recent rise in oil prices is sustained, it is far more likely to be passed on into other prices, since the labor market is sufficiently tight enough that workers should be able to prevent further real wage declines. Also, productivity growth appears to be slowing. Having declined last quarter by 0.5 percent, it appears that first quarter growth will be in the neighborhood of 1.0 percent. It is too early to assume a slower productivity path, but this should provide grounds for concern.
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.