CEPR

March 12, 2019 (Prices Byte)

By Dean Baker

Inflation in the core CPI has remained close to 2.0 percent for more than four years.

In spite of the low unemployment rate, there continues to be zero evidence of accelerating inflation. The overall Consumer Price Index (CPI) rose by 0.2 percent in February, but the increase for the last year was just 1.5 percent. The story was reversed in the core CPI, with an increase of just 0.1 percent in February, but a 2.1 percent rise over the last year. The difference is explained by a 0.4 percent increase in both food and energy prices in February. While food prices are up by 2.0 percent over the last year, energy prices are down by 5.0 percent.

The core index, excluding shelter, fell 0.1 percent in February and is up just 1.2 percent over the last year. Shelter is the only major component in the CPI with an inflation rate that is consistently well above the overall CPI. Both rent proper and owners’ equivalent rent rose 0.3 percent in February. They increased 3.4 percent and 3.3 percent, respectively, over the last year.

While inflation in most components of the core CPI appears well under control there is some modest evidence of acceleration if we compare the last three months (December, January, and February) with the prior three months (September, October, and November). The annualized rate in the core index over this period is 2.4 percent, while the annualized rate in the core, excluding shelter, is 1.7 percent. This is not a huge pickup from the year-over-year rates, but the acceleration is worth noting.


Looking at traditional problem areas, the medical care index actually fell by 0.2 percent in February and is up just 1.7 percent over the last year. The big factor in the February drop was a 1.0 percent decline in the price of prescription drugs, which are now down by 1.2 percent over the last year. It is important to remember that this index only looks at the change in the price of existing drugs, it is not affected by new drugs that may be introduced at very high prices.

The education index shows a somewhat worse picture, rising 0.3 percent for the second consecutive month. It is now up 2.9 percent over the last year. The auto insurance index, which had been a major factor pushing up core inflation, rose just 0.1 percent in February. It is up 2.0 percent over the last year.

Inflation in most other major areas seems well contained. Prices for new vehicles fell 0.2 percent in February and are up 0.3 percent over the last year. For used vehicles prices fell 0.7 percent in February and are up 1.1 percent over the last year. Apparel prices rose 0.3 percent last month, but are still down 0.8 percent over the last year.

The index for the category “other personal services,” which accounts for just over 2.0 percent of the core CPI, rose by 0.6 percent in February and is up 3.9 percent over the year. The largest component in this increase was a 0.3 percent February rise in the cost of haircuts and other personal services, which are up 3.3 percent over the last year. The most rapidly rising component in this category is tax return preparation, which jumped 2.6 percent in February and is up 13.8 percent over the last year.

One area that continues to have an outsized rate of inflation is health insurance. This index rose 1.3 percent in February and is up 7.7 percent over the last year. It is important to remember that this index is just capturing the administrative costs and profits of insurers, not the total premiums.

On the whole, this should be seen as a very positive price report. The 1.5 percent year-over-year inflation rate means that with nominal wage increases of 3.4 percent over the last year, real wages rose by almost 2.0 percent. Of course, the gap between the core CPI and the overall CPI is likely to close, as energy prices will not continue to fall. There is very modest evidence of some acceleration, which will have to be watched in future months.