Plunging Energy Prices Push CPI Down by 1.7 Percent in November
December 16, 2008
By Dean BakerReal hourly wages have risen at a 14.8 percent annual rate over the quarter.
A 17.0 percent drop in energy prices pushed the Consumer Price Index (CPI) down by 1.7 percent in November. This followed a drop of 1.0 percent in October. This is the sharpest two-month price decline since January-February of 1933, when prices dropped by 1.5 percent and 1.6 percent, respectively.
The core index was flat for November. It has now risen at a 0.4 percent annual rate over the last quarter, down from a 2.0 percent rate over the last year. The overall CPI has fallen at a 10.2 percent annual rate over the quarter, compared to an increase of 1.1 percent over the last year. The energy component has fallen at an incredible 69.3 percent annual rate over the last quarter. It stands 13.3 percent below its year ago level.
Prices of many of the components of the CPI are now falling and even traditional inflationary trouble spots, like medical care and education, are showing lower rates of inflation. The medical component increased by 0.2 percent in November. It has increased at a 2.9 percent annual rate over the last three months. Education costs rose 0.4 percent, bringing the annual rate over the last quarter to 4.9 percent, down from 5.9 percent over the last year.
Oversupply is leading to rapidly falling prices in many areas. The price of new cars fell by 0.6 in November. Used car prices fell by an even sharper 2.2 percent. Over the last three months new and used car prices have fallen at a 6.9 percent and 22.9 percent annual rate, respectively. Hotel prices are also being driven down by oversupply, falling 1.1 percent in November. They have fallen at a 7.4 percent rate over the last three months and are down by 5.1 percent over the last year.
All the signs at earlier stages of production point to further price declines in future months. The overall finished goods index fell by 2.2 percent, driven by an 11.2 percent decline in energy goods. The core index rose by 0.1 after rising by 0.4 percent in the prior three months.
While there are still categories of goods showing rising prices at the finished good level, this is likely to be reversed soon. The overall intermediate goods index fell by 4.3 percent in November. This was driven by a 12.3 percent decline in energy prices, but even the core index fell by 2.3 percent after dropping by 1.7 percent in October. The core intermediate goods index has fallen at a 16.0 percent rate over the last three months.
Crude goods prices are falling even more rapidly. The overall index fell by 12.5 percent in November, while the core index dropped 20.4 percent. The overall crude goods index has fallen at an 81.5 percent rate over the last quarter, while the core index has fallen at an 87.2 percent rate. It is clear that commodity prices were in a free fall over the last few months.
The rapid rate of price decline in oil and other major commodities may actually prove beneficial. With prices of many of these commodities now badly depressed, it is likely that production will be withdrawn from the market and prices will start to move back upward. The effect of lower commodity prices will take time to percolate through the system, which means that prices for many manufactured goods will be drifting downward in the months ahead. This is also helped by the falling prices of all imports, including manufactured goods, which is a result of the recent run-up of the dollar.
The positive side of this picture is that falling prices are leading to rapid increases in real wages. There has been little change in the pace of nominal wage growth thus far, with the annual rate still above 3.0 percent. In a context of falling prices, this implies an extraordinarily rapid pace of real wage growth. As unemployment continues to rise, nominal wage growth will slow, but at the moment, the workers who still have jobs are seeing some of the fastest real wage growth on record.