Inflation Stays Moderate in February
By Dean Baker
March 18, 2009
Oversupply caused hotel prices to drop at a 13.2 percent rate over the last quarter.
After falling sharply in the last three months of 2008, the overall CPI rose 0.4 percent in February, following a 0.3 percent rise in January. The core index also rose by 0.2 percent for the second consecutive month. Over the last three months, the overall CPI has fallen at a 0.5 percent annual rate, while the core index has increased at a 1.5 percent rate.
The price increases were spread broadly across sectors. Health care costs seem to be rising rapidly again, increasing by 0.3 percent in February after rising 0.4 percent in January. They have now risen at a 4.3 percent annual rate over the last quarter. For the month, apparel prices rose by 1.3 percent, new car prices rose by 0.8 percent, and recreation prices rose by 0.4 percent. These are all anomalous price jumps that are likely to be at least partially reversed in future months.
Housing costs continue to hold down the inflation rate with both the rent index and owners’ equivalent rent index increasing by just 0.1 percent. The hotel price index fell 1.8 percent in February. It has fallen at an incredible 13.2 percent annual rate over the last quarter, reflecting the enormous oversupply in the industry.
The finished goods index in the Producer Price Indexes rose by 0.1 percent in February, following a 0.8 percent increase in January. A 1.6 percent drop in food prices more than offset a 1.3 percent rise in energy prices. The core finished foods index rose by 0.2 percent. It has risen at a 3.6 percent annual rate over the last three months. The core consumer goods index rose by 0.4 percent in February. It has risen at a 4.8 percent annual rate over the last quarter.
Some of the items driving the relatively high inflation in consumer products in February were likely due to tax increases at the state level. Tobacco prices rose 2.7 percent in February after rising 0.6 percent in January. The price of alcoholic beverages rose 1.2 percent in February after rising 0.8 percent in January. These price increases likely reflect the pass through of new taxes and will not be repeated in future months.
There is no evidence of inflationary pressures at earlier stages of production. The overall intermediate goods index fell 0.9 percent in February, its seventh consecutive month of decline. The core intermediate goods index fell by 0.6 percent, its fifth consecutive month of decline. The over all intermediate goods index has fallen at a 21.2 percent annual rate over the last three months while the core index has fallen at a 21.2 percent rate.
The crude goods index also continues to decline sharply, dropping by 4.5 percent in February, although the core index rose by 1.5 percent, its second consecutive increase. The overall index has fallen at a 40.7 percent annual rate over the last three months, with both food and energy prices falling sharply, while the core index has fallen at a 2.4 percent annual rate.
Non-oil import prices fell by 0.6 percent in February, the seventh consecutive monthly decline. This rate of price decline has slowed in recent months. The rate of price decline for non-fuel imports was just 0.4 percent in February. The price of manufactured imports from developing countries fell by 0.3 percent, while prices of manufactured goods from wealthy countries actually increased by 0.1 percent. On this and other data it appears that the downward price momentum is slowing.
Overall, the February data should help to relieve concerns about a deflationary spiral. There are still areas, most notably food, where prices at earlier stages of production are declining sharply, but it appears the rate of price decline in many sectors is slowing and many prices are rising. Modest inflation will help to relieve debt burdens, although it will slow the rate of real wage growth compared to a situation in which prices are falling. The 0.4 percent rate of inflation for February is actually slightly higher than the 0.3 percent rate of nominal wage growth for the month.