By David Rosnick
Falling energy prices hold headline inflation in check
The Consumer Price Index was unchanged in April as the price of energy commodities fell 2.6 percent. The core index of consumer prices (which excludes volatile food and energy prices) rose 0.2 percent in the month and at a 1.9 percent annualized rate over the last three.
Nearly all energy prices showed large declines in April, the only exceptions being a 0.8 percent rise in propane, kerosene and firewood and a 0.2 percent gain in electricity services. By contrast, motor fuel, which alone weighs twice as large in the index, fell 2.6 percent.
Growth in food prices remains modest, jumping 0.2 percent in April with a 1.0 percent increase in the price of fruits and vegetables balancing out a 1.0 percent fall in dairy. Over the last three months, food price inflation has run at relatively low 1.7 percent annualized rate. By contrast, food prices are up 3.1 percent over the last 12 months.
By far, shelter comprises the largest component of core consumer prices—more than 41 percent of the index—and the price of shelter rose 0.2 percent for the seventh consecutive month. Over the past 12 months, shelter prices have grown 2.2 percent. Shelter is overwhelmingly comprised of rent and owners’ equivalent rent—each of which rose 0.2 percent in April.
Elsewhere in the core, the price of used cars and trucks jumped 1.5 percent after a 1.3 percent gain in March. However, this follows six months of price declines and the level remains 0.3 percent below its peak last August.
On the other side, the price of medical care commodities was unchanged last month. As previously reported, in February this category of goods had seen the largest single-month price increase in 13 years. Over the last year, medical care commodity prices have increased 2.7 percent, compared with 2.3 percent among all core prices.
The other large gain among core prices last month came in airline fare, which out of necessity passes along changes in energy prices. Fares jumped 2.1 percent in April, and have increased by a cumulative 2.4 percent since January compared with 2.3 percent for energy prices overall. Similarly, airline fares have risen 1.2 percent over the past year compared with 0.9 percent for energy.
The Producer Price Index fell 0.2 percent in April and has grown at a 0.6 percent annualized rate since January as the price of finished energy goods fell 0.7 percent below its April 2011 level. Inflation in core finished goods has slowed slightly, to a 2.5 percent annualized rate over the last three months compared to 2.7 percent from October to January and 3.0 percent over the six months from April to October of 2011.
At earlier stages of production we see the same pattern of falling energy prices and disinflation in the indices of core goods. The price of core intermediate goods rose 0.2 percent in April after rising 0.6 percent in March and 1.0 percent in February. Similarly, that of core crude goods fell 1.8 percent last month—more than giving back the 1.1 percent gain the month prior. As discussed in last month’s report, the sudden burst of inflation in core prices early in the year followed earlier declines in these more volatile indices.
Import prices fell 0.5 percent in April after a 1.5 percent gain in March. This bounce was overwhelmingly due to fuel imports—the price of which declined 2.1 percent last month following a 4.4 percent gain. Core import prices have grown at a 2.7 percent annualized rate since January and 1.8 percent over the last year.
Export prices have also worked through unusual price changes in recent months, though the timing has been different as fuel represents a smaller share of exports than it does imports. Since a 2.0 percent fall in export prices last October, export prices have climbed 1.6 percent. Similarly core export prices have grown at a 4.0 percent annualized rate over the last three months but only 0.8 percent over the last year.
With core consumer price inflation both low and stable and with little hint of price pressures coming from earlier stages of production, there can be little reason for inflationary fears. Rather, an increase in the rate of inflation would be welcome economic news. Additional deflation of nominal debts and lowering of real interest rates would help spur demand in the economy and induce additional hiring. This would be particularly important to the United States if the deflationary crisis in Europe should cause both a fall in demand for American exports compounded by a sharp rise in the dollar. As with the Eurozone, so too the domestic economy would be better served by a central bank that permitted some additional inflation.