March 14, 2008 (Prices Byte)

By Dean Baker

"Higher import prices and weak productivity growth are likely to lead to higher inflation."

The overall CPI was unchanged in February as a 0.5 percent drop in energy prices offset a 0.4 percent rise in food prices. The core index was also flat as inflation moderated in several areas and apparel and car prices fell for the month. Over the last three months the overall CPI has risen at a 3.1 percent annual rate, down from a 4.0 percent rise over the last year. The core rate has risen at a 2.3 percent annual rate over the last three months, the same as its rate over the last year.

While the inflation news is encouraging, it is likely that this report is somewhat of an anomaly. Last month, inflation in both the core and overall CPI was higher than expected. It is likely that more price increases were picked up in the data in January and therefore the price rises were less than might otherwise have been the case for February.

For example, medical care costs reportedly jumped 0.5 percent in January, but rose just 0.1 percent in February. Tuition costs rose by 0.6 percent in January, but just 0.3 percent in February. Apparel prices rose 0.4 percent in January, but fell 0.3 percent in February. Hotel prices fell 1.2 percent in February after jumping by 1.1 percent in January. For these items, the three month averages probably provide the best measure of the underlying inflation rate, since these movements are likely dominated by noise.

There are components where inflation does appear to be slowing, most notably for the two rental components. The rent proper index rose just 0.2 percent in February after rising 0.3 percent in January and 0.4 percent in December. The owners’ equivalent rent index rose by just 0.1 percent after rising by 0.3 percent the prior two months. Over the last three months these two indexes have risen at a 3.6 percent and 2.6 percent annual rates, respectively, roughly the same as their rate of increase over the last year. With the enormous glut of housing on the market, it is not surprising that rents would trail the overall rate of inflation.

The February PPI has not been released, but the data from the import and export price indexes indicate that inflationary pressures continue to mount at earlier stages of production, driven in large part by the falling dollar. Non-oil import prices rose by 0.6 percent in February, following an upwardly revised 0.7 percent rise in January. Over the last three months, non-oil import prices have risen at a 7.0 percent annual rate, compared to a 4.5 percent increase over the last twelve months.

Import prices continue to rise across the board, from almost all countries and all types of goods and services. The price of goods imported from the European Union rose at an 11.2 percent annual rate over the last three months compared to a 5.0 percent increase over the last year. The prices of goods from China have risen at a 4.1 percent annual rate over the last three months, compared to 3.2 percent for the last year. Prices for imports from Japan have risen by 2.4 percent over the last three months, after having previously been virtually flat – prices for the last year are up by just 0.7 percent.

The data on the export side show a comparable picture. Non-agricultural export prices rose by 0.5 percent in February and have risen at 6.1 percent annual rate over the last quarter, up from a 4.6 percent rate over the last year. Prices for agricultural exports have really exploded, rising by 4.4 percent in February alone. In the last quarter, they have risen at a 58.2 percent annual rate, compared to 30.8 percent over the year. The falling dollar is an important factor in export prices also, which in turn are reflected in higher prices for goods that stay in the country.

The February price report is good news in the context of other inflation reports indicating that inflation is rising under the pressure of higher commodity and import prices and weaker productivity growth. However, it is likely that this report will prove to be the anomaly in the data. 

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.