Inflation Returns in January as Both Consumer and Producer Prices Rise
February 20, 2009
By Dean Baker
Vacancies have pushed hotel prices down at a 9.5 percent rate over the quarter.
After falling sharply for the last three months, the overall CPI rose 0.3 percent in January, the first increase since July. The finished goods index in the Producer Price Indexes rose by 0.8 percent, following five months of declines. Both core indexes also showed increases in January, 0.2 percent in the case of the CPI and 0.4 percent in the finished goods index.
The overall CPI has fallen at an 8.4 percent annual rate over the last quarter and has been flat over the last year. The core CPI has risen at a 0.9 percent annual rate over the last quarter, down from a 1.7 percent rate over the last year.
The increase in the January CPI was mostly driven by erratic price increases that are unlikely to recur in future months. For example, apparel prices rose by 0.3 percent in January. This was a partial bounce back from a 0.6 percent price decline in December. Apparel prices going forward are likely to be close to flat, at least until the dollar falls again. New car prices rose 0.3 percent after falling sharply over the last six months. Car prices will be stable or trend downward in the months ahead. Cigarette prices jumped 0.8 percent, which is presumably the result of new tobacco taxes that took effect at the start of the year.
One area of higher inflation that may prove lasting is health care, which reported a 0.4 percent rise in prices, the highest since a 0.5 percent rise last January. It is possible that the higher prices being charged by providers is a way to make up for cuts in payments by governments at various levels. If this is the case, then health care costs may continue to rise rapidly in the future. In this respect, it is worth noting the 0.3 percent rise in tuition costs. This is well below the 5.4 percent rate over the last year. Given the cuts in public funding and the sharp losses incurred by endowments at private schools, this is almost certainly an anomaly on the low side.
Owner-equivalent rent and rent proper both rose at 0.3 percent rates in January. Over the last three months they have risen at a 2.3 percent and 3.1 percent annual rate, respectively. The more rapid rise in the rent proper index is almost certainly due to the inclusion of utilities. The huge glut of vacant housing units will be putting downward pressure on rents for years to come.
The index for hotel prices fell 1.1 percent in January and has fallen at a 9.5 percent annual rate over the quarter. Soaring vacancy rates, due to overbuilding and reduced demand, will depress hotel prices at least into 2010.
The price increases at the finished goods level also seemed driven largely by one-time factors. For example, alcoholic beverages rose 0.8 percent, which was likely attributable to new taxes. Toys rose 7.2 percent in January and sporting goods rose 4.2 percent. Both increases were most likely anomalies that will not be repeated in future months.
There certainly is no evidence of inflation at earlier phases of production. The overall intermediate goods index fell 0.7 percent, its 6th consecutive decline. The core intermediate goods index fell 1.1 percent in January and has now fallen at a 22.7 percent annual rate over the last quarter. The overall crude goods index fell 2.9 percent in January while the core index rose 0.1 percent after five months of extremely sharp declines. This index is down 27.9 percent from its year ago level.
In spite of the higher than expected inflation in January, there clearly is no basis for concern about inflation in the current economic climate. At the same time, concerns about deflation may have been somewhat overplayed. The commodity price plunge seems to have stopped, and there are sources of upward pressure on prices, for example cutbacks in government funding for health care and education. However, in some areas, most notably rents, hotels, and used cars, enormous excess supply will lead to sharp downward pressure on prices for some time to come.