May 15, 2007 (Prices Byte)
By Dean Baker
Wage growth is lagging far behind inflation.
A 0.4 percent rise in food prices, coupled with a 2.4 percent jump in energy prices, pushed the CPI up by 0.4 percent in April. This brings the annual rate of increase over the last three months to 5.7 percent, approximately 2 percentage points above the rate of wage growth over this period. The core inflation rate was just 0.2 percent, held down by falling apparel prices and slower rental inflation. The core inflation rate for the last three months has been just 1.9 percent, down slightly from its 2.3 percent rate over the last year.
Most of the anomalies in this month’s report were on the low side. Apparel prices fell 0.3 percent after dropping 1.0 percent in March. Apparel prices have dropped at a 3.3 percent annual rate over the last three months. The public transportation index, which accounts for 1.4 percent of the core index, fell by 0.4 percent, driven by a 0.9 percent drop in airfares. This will almost certainly be reversed in future months, as airlines pass on higher fuel costs. The household furnishing and operations index, which accounts for 6.0 percent of the core CPI, fell by 0.4 percent in April. Tobacco products also posted an unusual 0.4 percent decline in April.
The only obvious aberration on the high side was a 1.9 percent jump in hotel prices. This largely reversed a 2.3 percent decline reported in March.
Housing continues to be an important factor moderating inflation. The owners’ equivalent rent (OER) index and the rent proper index both rose just 0.2 percent in April. The OER index, which accounts for 30.9 percent of the core index, has risen at just a 3.0 percent annual rate over the last three months. By comparison, it was rising at more than a 5.0 percent annual rate in the spring of 2006. The slower increase in rents no doubt reflect the extraordinary nationwide vacancy rates. The vacancy rate for rental units is near a record high and the vacancy rate for ownership units is almost 50 percent above its prior peak. This glut of housing will keep a lid on rental inflation for the foreseeable future.
Medical care costs rose by 0.4 percent in April, bringing the annual rate of increase over the last three months to 3.9 percent, almost exactly the same as the 4.0 percent rate over the last year. Education costs rose by 0.4 percent, bringing the rate of increase over the last three months to 6.6 percent, slightly above the 6.0 percent rate over the last year.
There continues to be a mixed picture on inflation at earlier stages of production. The overall finished goods index rose by 0.7 percent, driven by increases of 0.4 percent in food prices and 3.4 percent in energy prices. The index has risen at an extraordinary 12.8 percent annual rate over the last quarter. However, the core index was flat for the second consecutive month. The core index has increased at a 1.5 percent annual rate over the last three months.
Both the core and overall intermediate and crude goods index showed substantial evidence of inflation in April. The overall intermediate goods index rose 0.9 percent in April. It has risen at a 12.8 percent rate over the last three months. The core intermediate goods index jumped 0.8 percent in April, pushing the annual rate of inflation in the index to 4.9 percent over the quarter. The overall crude goods index fell 1.5 percent in April, pushed down by a reported drop in energy prices, but even with the April decline, the index has still risen at a 50.9 percent annual rate over the last three months. The core crude goods index has risen at a 51.9 percent rate over this period.
The April CPI data still show core inflation to be reasonably well contained. However, with serious inflation in the non-core elements, and considerable evidence of inflation at earlier stages of production, there are grounds for believing that core inflation will rise in the future. This is especially likely if productivity growth remains slow.
Dean Baker is co-director of Center for Economic and Policy Research in Washington, DC.
Prices Byte is published each month upon release of the Bureau of Labor Statistics’ reports on the consumer price and the producer price indexes.