November 15, 2007 (Prices Byte)

By Dean Baker

“The price of Chinese imports has risen at a 3.2 percent annual rate since July."

The overall CPI rose by 0.3 percent in October, the same rate as in September. The core index rose by 0.2 percent for the fifth consecutive month. The annual rate of inflation in the core index over the last three months has been 2.1 percent, nearly identical to the 2.2 percent rate over the last year. The annual rate in the overall CPI has been just 1.7 percent over the last three months, compared to a 3.5 percent rate over the last year.The difference between the overall inflation rate and the core rate in October was primarily attributable to a 1.4 percent increase in energy prices. Food prices increased 0.3 percent in October. They have increased at a 4.9 percent annual rate over the last quarter and are up 4.4 percent over the last year.

There were few obvious anomalies in either direction in the October report. Hotel prices fell by 1.5 percent in October, but this followed a 1.0 percent increase reported in September. Over the last quarter they have fallen at a 4.3 percent annual rate. This rate of price decline will not be sustained, but an enormous boom in hotel construction over the last two years is probably leading to some excess capacity and downward pressure on prices.

New car prices fell by 0.2 percent in October after falling 0.3 percent in September. They have fallen at a 1.6 percent rate over the quarter. This is likely a somewhat faster rate of decline that will be sustained in the future.

On the high side, medical care prices rose by 0.6 percent in October, but this followed an increase of just 0.3 percent in September. Medicare care prices have been rising at a 5.7 percent rate over the last quarter, which is somewhat higher than the 4.8 rate over the last year. Medical care inflation will likely moderate slightly in the months ahead.

Tuition costs jumped by 0.8 percent in October after rising by just 0.1 percent in September. Tuition has risen at a 5.6 percent rate over the last quarter, almost the same as its 5.3 percent rate in the last year. 

Inflation appears well-contained at earlier stages of production. The overall finished goods index rose by 0.1 percent in October. It is up 6.1 percent over the last year, but has fallen at a 0.7 percent annual rate over the last quarter. The core index was flat in October and has increased at just a 1.0 percent annual rate over the last quarter. The core finished consumer goods index has risen at a more rapid 1.9 percent annual rate over the quarter, but this is less than the 2.8 percent increase over the last year. 

The overall and core intermediate goods indexes both rose by 0.1 percent in October. The overall intermediate goods index has fallen at a 2.8 percent annual rate over the quarter while the core index has declined at a 0.9 percent annual rate. The crude goods indexes show a very different picture, with the overall index rising 2.4 percent in October and the core index increasing 1.4 percent. The overall index has fallen at a 2.3 percent rate over the quarter, but is up 25.7 percent over the year. The core index has increased at an 18.9 percent rate over the quarter, almost identical to the 18.6 percent rate over the last year.

On the whole the inflation picture seems relatively benign. Except for crude goods prices, there is little evidence of any serious issues with inflation. The slower rate of productivity growth from 2004 through the first quarter of this year might have provided a basis for concern about rising inflation, but productivity growth has been very healthy the last two quarters. If productivity is back on its strong 1995-2004 growth path (a very big “if”), then there seems little basis for concern about inflation in the near future. However, if the recent surge in productivity proves to be an aberration, then rising import prices will lead to somewhat higher inflation throughout the economy in the months ahead.

Dean Baker is co-director of Center for Economic and Policy Research in Washington, DC. CEPR's Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and the producer price indexes. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or morgavan [at] cepr [dot] net.