Inflation Slows in February
March 16, 2006
By Dean Baker
The overall consumer price index rose by just 0.1 percent in February, bringing its annual rate of increase over the last three months to 2.7 percent. This is down considerably from the 3.6 percent inflation rate over the past year. The core (excluding food and energy) CPI also rose by 0.1 percent bringing the annual rate of inflation in the core for the last quarter to 2.0 percent, almost identical to the 2.1 percent rate over the last year.
The core inflation rate was held down in part by a 1.0 percent drop in apparel prices, a component that makes up 4.9 percent of the core index. Apparel prices are always erratic because of the difficulty of making seasonal adjustments. They have declined at an annual rate of 3.6 percent over the last quarter, compared to a 1.8 percent drop over the last year. These declines will be at least partially reversed in the months ahead.
Medical care inflation has also been surprisingly low in recent months. The component increased by 0.5 percent in February, bringing the annual rate of inflation over the quarter to 3.3 percent. This is down somewhat from the 4.0 percent increase in medical care prices over the last year. It is likely that there will also be somewhat more rapid inflation in medical care prices in the months ahead.
Education costs rose by a relatively low 0.3 percent in February, but this followed a 0.8 percent jump in January. The inflation rate in the education component over the last quarter has been 6.4 percent, virtually identical to its 6.1 percent rate over the last year.
There has been a slight uptick in the rate of inflation in rents, with both owners’ equivalent rent (OER) and rent proper rising by 0.3 percent in February. The annual rate of inflation in the two components over the last quarter has been 2.3 percent and 3.1 percent, respectively. The latter is up more than a half percentage point from the 2.5 percent inflation rate over the last year. Rents had been held down by a near record nationwide vacancy rate. The rent proper component has been pushed upward in part by higher utility prices, but is not clear why the OER index (which excludes utilities) would be rising at the moment.
The producer price index will not be released until next week, so there is little basis for assessing costs at earlier stages of production. Non-petroleum import prices fell by 0.5 percent in February, but this was driven by a sharp drop in natural gas prices. Excluding all fuels, import prices rose by 0.2 percent in February. This index has risen at almost a 3.0 percent annual rate over the last quarter, which compares to an increase of just 0.8 percent over the last year. This indicates that non-energy import prices actually have been rising considerably more rapidly in recent months than they did in 2005.
Non-agricultural export prices rose by 0.1 percent in February, bringing their annual rate of increase over the last quarter to 4.0 percent. This is up from a 2.6 percent inflation rate over the last year. Insofar as the goods that the U.S. exports are representative of the larger economy, this would imply some uptick in inflation at the wholesale level. This is consistent with last month’s producer price index, which showed a 0.4 percent rise in the core finished goods index.
The inflation data in the February report is surprisingly low, given recent evidence of more rapid wage growth, and also slower productivity growth. The somewhat more rapid rise in non-fuel import prices in recent months should also be a source of inflationary pressure. However, while inflation may show up in future reports, at the moment, the economy is performing quite well. The rate of job creation over the last half year has certainly been respectable. In addition, the labor market has finally tightened to the point that workers are receiving real wage gains. How long this can continue without some uptick in inflation remains to be seen, but at the moment, the economy looks healthy.
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.