April 16, 2008 (Prices Byte)
By Dean Baker
"The price of imports from China has risen at a 7.0 percent annual rate this year."
A reported 1.3 percent decline in apparel prices kept the increase in the overall CPI down to 0.3 percent in March and the increase in the core CPI down to 0.2 percent. The overall CPI has now increased at a 3.1 percent annual rate over the last three months, compared to a 4.0 percent rate over the last year. The core index has increased at just a 2.0 percent rate over the quarter, compared with a 2.4 percent rate over the last year.
In addition to the reported fall in apparel prices, there were several other anomalies that held inflation down in March. Hotel prices fell by 0.6 percent after dropping by 1.2 percent in February. Clearly this rate of decline will not be sustained. Medical care costs rose by just 0.1 percent for the second consecutive month. It is unlikely that health care costs have suddenly been contained. Tobacco prices were also reported as falling, a rare occurrence given the policy of raising cigarette taxes to discourage consumption, although the decline was just 0.1 percent. There were no obvious anomalies raising the rate of inflation in March.
One real factor containing inflation is the slowing of rental price increases. Owners’ equivalent rent, a measure that excludes utility costs, rose by just 0.2 percent in March. It has now risen at just a 2.5 percent annual rate over the last quarter, well below the rate of inflation. The rent proper index has risen at a 3.1 percent annual rate over this period, with the difference likely explained by higher utility costs that are often included in the rent paid by tenants.
While the inflation numbers at the consumer level seem relatively contained, this is not the case at earlier stages of production. The overall finished goods index rose 1.1 percent in March driven by a 2.9 percent rise in energy prices and a 1.2 percent increase in food prices. The finished goods index has risen at a 10.2 percent annual rate over the last quarter, up from a 6.9 percent rate over the last year. The core index rose 0.2 percent in March, but this followed two months of more rapid increases. Over the quarter, the core finished goods index has risen at a 5.0 percent annual rate while the core finished consumer goods index rose at a 5.5 percent rate. This compares with rates of inflation over the last year of 3.6 percent and 4.2 percent, respectively.
The overall intermediate goods index rose by 2.3 percent in March, while the core index rose 1.1 percent. The overall intermediate goods index has risen at a 19.4 percent annual rate over the last quarter, up from a 10.5 percent rate over the last year. The core index has risen at a 10.7 percent rate over the quarter compared to a 5.5 percent rate over the last year. The overall crude goods index has risen at a 73.4 percent rate for the last quarter, while the core crude goods index has risen at a 52.6 percent annual rate. Over the last year, the two indexes rose 47.1 percent and 16.8 percent, respectively.
The worldwide surge in commodity prices is the main villain in this picture, but the falling dollar is leading to higher import prices in general. Non-fuel import prices rose at 0.9 percent in March and have risen at an 8.7 percent annual rate over the last quarter. This compares with an increase of 5.0 percent over the last year. Import prices are rising across the board. In particular, prices of imports from China rose 0.7 percent in March. They have risen at a 7.0 percent annual rate over the quarter, up from a 4.0 percent rate over the last year.
Higher import prices and rising world commodity prices will eventually show up in higher consumer inflation. This is especially likely since the surge in productivity growth that began in 1995 seems to have puttered out. Productivity growth has averaged less than 1.7 percent since the second quarter of 2004. Weak productivity growth means that higher input prices will either lead to consumer inflation or smaller profits.
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.