September 16, 2008 (Prices Byte)
By Dean Baker
"Core inflation, excluding OER, has risen at a 4.1 percent annual rate over the quarter."
The overall CPI fell 0.1 percent in August, driven by a 3.1 percent decline in energy prices. The core index increased at 0.2 percent, bringing the annual rate of increase in the core over the last quarter to 3.4 percent. This is almost a full percentage point higher than the 2.5 percent core inflation rate over the last year. The overall CPI has increased at a 7.2 percent rate over the last quarter, up from a 5.4 percent increase over the last year.
Apart from the good news on energy prices, the rest of the inflation picture is mixed. Food prices jumped 0.6 percent in August, bringing their annual rate of increase over the quarter to 9.6 percent, up from a 6.1 percent rate over last year.
Core inflation continues to be held down by the glut of housing, which is containing rental inflation. Owners’ equivalent rent (OER) rose by just 0.1 percent for the second consecutive month. It has risen at just a 2.1 percent annual rate over the last quarter. The rent proper index, which includes utilities, rose at a 0.3 percent rate for the second consecutive month.
The OER component by itself accounts for 31.3 percent of the core index. Without the OER component, the core inflation rate would have been 4.1 percent over the last quarter.
Medical care costs continue to be remarkably well contained, rising at just a 0.2 percent rate. They have risen at just a 2.1 percent rate over the last quarter. Medical care inflation had been well over 4.0 percent in 2007, so this slowdown is striking. Education continues to be a problem with costs rising 0.6 percent in August. They have risen at a 6.3 percent rate over the last quarter, almost the same as their 6.0 percent increase over the last year.
New vehicle prices continue to be somewhat anomalous. They reportedly fell 0.6 percent in August and have fallen by 1.3 percent over the last year. This price decline is hard to reconcile with the 2.7 percent price increase over the last year reported for passenger cars in the producer price index. If both numbers are accurate, it would imply an extraordinary squeeze on dealers’ profit margins.
There is continued evidence of higher inflation in other CPI components. Apparel prices rose by 0.5 percent in August and have risen at a 7.4 percent annual rate over the last quarter. Recreation prices rose 0.5 percent in August and have risen at a 4.4 percent rate over the last three months. Both components had been close to flat, or falling, prior to the start of the year.
The picture at earlier stages of production is also mixed. The overall finished goods index fell by 0.9 percent in August, due to a 4.6 percent drop in energy prices. However, it is still 9.6 percent above its year ago level. The core finished goods index rose by 0.2 percent in August. The core index has risen at a 4.6 percent annual rate over the last quarter, up from a 3.6 percent rate over the last year.
The overall intermediate goods fell by 1.0 percent in August, as energy prices fell by 8.2 percent. However, the core intermediate goods index rose by 1.7 percent. The core index has risen at a 21.7 percent annual rate over the last quarter. The overall and core crude goods indexes fell by 11.9 percent and 1.9 percent, respectively, reflecting the world-wide drop in commodity prices.
The overall price picture in the August data is quite mixed. The drop in energy prices has removed an important source of inflationary pressure, although businesses have not yet fully passed on prior increases in energy prices. Clearly, there is no wage pressure as the rate of nominal wage increases is already slowing due to the weakening of the labor market. Nonetheless, the impact of higher commodity and import prices will continue to put upward pressure on inflation. However, if the dollar remains high and the reversal in commodity prices sticks, then inflation will slow 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 warner [at] cepr [dot] net.