CEPR

September, 2016 (Prices Byte)

By Nick Buffie

Inflation Ticks Up, but Increases Differ across Regions and Industries

The Consumer Price Index (CPI-U) for August showed that prices over the past three months (June, July, and August) are less than 1.0 percent higher than from the same three months of 2015. “Core” inflation, which excludes volatile food and energy prices, is up by almost 2.3 percent using the same methodology. Interestingly, this is actually the inflation rate targeted by the Fed for the core CPI (the normal 2.0 percent target is for a different price index). The discrepancy between actual inflation and core inflation was driven predominantly by declining energy costs. Whereas food prices increased 0.2 percent last year, energy prices fell by 9.9 percent.

Much of the increase in prices last year was driven by rising shelter costs, which are up 3.4 percent from one year ago. Excluding shelter, overall prices actually fell by 0.2 percent last year — meaning there was outright deflation. Core inflation minus shelter was a meager 1.4 percent. This represents a slight acceleration over the previous three years. According to this measure, price growth was 1.2 percent in 2013, 1.1 percent in 2014, and 0.9 percent in 2015.

In terms of the prices for specific goods, a few items showed notable declines. Prices for televisions fell 20.0 percent over the past year, continuing a six-decade decline in costs. In fact, adjusted for changes in quality, televisions today cost less than three percent of what they did in 1983. The prices of eggs declined 31.5 percent, while the prices of used cars and trucks declined 3.6 percent. Furniture and bedding costs fell 3.0 percent.

Apparel prices have moved in different directions depending on the type of price. Costs for women’s apparel are up 0.9 percent relative to last year, while the prices for men’s apparel haven’t moved at all. On the other hand, prices for jewelry and watches increased 6.4 percent.

Recreational reading materials increased in price last month after a previous bout of deflation; the July-over-July price drop of 1.6 percent represented the largest-ever annual decline, and the price increase in August means that there is no August-to-August price change. On the other hand, the prices of college textbooks are up 6.6 percent over the past year. This discrepancy is likely due to a combination of monopoly pricing and inelastic demand (thanks to the fact that students themselves can’t change the textbooks used in their courses) in the market for college textbooks.

In terms of different parts of the country, regional inflation data show that the South and the Northeast are tracking national price changes. Inflation is above-average in the West but remains weak in the Midwest region. In two major Midwestern cities — Cleveland and Chicago — the local economies are experiencing outright deflation, with Chicago seeming to experience an accelerating rate of deflation. (Prices fell 0.1 percent between July 2015 and July 2016 but fell 0.3 percent between August 2015 and August 2016.) This may prove to be a temporary blip, but at the very least, prices in Chicago should be watched going forward.

Besides the CPI-U, the other price indexes also showed very low rates of inflation. The producer price index (PPI) showed no change in prices over the past 12 months. The PPI excluding food, energy, and trade increased 1.2 percent over the last year. Over the past 10 months, monthly inflation has been negative just once, but for all months it has stayed in the relatively low range of -0.1 to +0.3 percent.

Data in the import-export price indexes were slightly discouraging. Import prices declined 2.2 percent over the past 12 months thanks largely to a 12.2 percent decline in fuel imports. (Prices for all other imports declined just 0.9 percent.) This represents a real income gain for the American public since it means that consumers are paying cheaper prices for imported goods. Unfortunately, the decline in import prices was paralleled by a 2.4 percent decline in export prices, meaning that other countries’ consumers are sending less money our way as well.

The latest inflation data show mixed results, though there seems to a very sluggish movement back towards target inflation. Core inflation in the CPI finally ran (just about) at the Fed’s target, though much of this was driven by a single item, shelter costs. Moreover, inflation remains incredibly low in one region of the country, the Midwest. This indicates that inflation is beginning to pick up, but is doing so very slowly and isn’t showing up in a uniform way across the country.