January 18, 2007 (Prices Byte)
By Dean Baker
Near zero productivity growth will worry the Fed.
The CPI rose by 0.5 percent in December, driven by a 4.6 percent jump in energy prices. The core (excluding food and energy) CPI rose by 0.2 percent. The overall CPI has risen at 0.2 percent annual rate over the last quarter, compared to an increase of 2.5 percent over the last year. The core CPI has risen at a 1.4 percent annual rate over the last three months, down from a 2.6 percent rate over the last year.
The December jump in energy prices will be reversed in the January data, with gas and other energy prices falling back near the autumn lows. However, food prices, which were flat in December after falling by 0.1 percent in November, are likely to show some uptick in January, at least partially offsetting the impact of falling energy prices.
There were several anomalous price movements in the core index in December that were at least partially offsetting. On the high side, apparel prices rose by 0.6 percent after having fallen by a total of 1.0 percent over the previous two months. For the quarter, apparel prices have fallen at a 1.7 percent annual rate, which is more rapid than the trend rate of price decline, meaning that we should expect to see some more price increases in this component.
The other big high side anomaly was a 0.8 percent jump in the price of “other goods and services.” This was driven by big jumps in the price of tobacco and personal care products, which reversed unusual price declines in November.
The medical care index rose by just 0.1 percent. A big factor was a 0.5 percent decline in prescription drug prices. This was undoubtedly attributable to the spread of Wal-Mart’s $4 prescription price for generic drugs (now matched by other chains). However, prices of hospital services have also moderated, rising just 0.1 percent in each of the last two months after rising by 6.1 percent over the last year. Inflation in the medical care component will likely be higher in future months, which will put upward pressure on the core inflation rate.
New car prices fell by 0.2 percent in December and used car prices fell by 0.8 percent. Over the last quarter, the prices of these two components have declined at a 4.0 percent and 12.9 percent annual rate, respectively. These declines will be partially reversed in the months ahead. Similarly, airfares fell by 2.4 percent in December. They declined at a 26.7 percent annual rate since July. This price decline will not continue.
Owners’ equivalent rent (OER) rose by 0.3 percent for the second consecutive month, while rent proper rose by 0.5 percent. The larger increase in the latter is explained by the lagged effect of higher utility prices being passed on in higher rents. (Utility costs are not included in OER.)
The producer price indexes show a mixed picture. Inflationary pressures at early stages of production definitely appear to be diminished. The core crude goods index rose at just a 0.8 percent annual rate over the last quarter, while the core intermediate goods index declined at a 1.4 percent rate. Over the last year, these indexes have risen by 16.7 percent and 4.7 percent, respectively. However, the core finished goods index rose at a 2.3 percent rate over the last quarter, compared to a 2.0 percent rate over the last year. While there is no clear upward trend in the inflation rate in the finished goods index, it is also not showing evidence of moderation.
There is little reason for concern about rising inflation in these reports, although the inflation rate is likely to remain somewhat higher than the Fed’s comfort level. Most of the anomalies seem to have depressed the inflation rate in recent months. With more rapid inflation in cars and medical care in the months ahead, the core inflation rate is more likely to rise than fall. Also, productivity growth has clearly tapered off in recent quarters. It is likely to be close to zero in the 4th quarter, repeating the weak performance of the 3rd quarter.
Dean Baker is Co-director of Center for Economic and Policy Research in Washington, D.C.
Prices Byte is published each month upon release of the Bureau of Labor Statistics’ reports on the consumer price and the producer price indexes.