CEPR

April 10, 2019 (Prices Byte)

By Dean Baker

The core index, excluding shelter, has risen at just a 1.3 percent annual rate over the last three months.

The March Consumer Price Index (CPI) again showed no evidence of accelerating inflation. The overall CPI rose 0.4 percent in March, bringing its increase over the last year to 1.9 percent. However, the big factor behind the March rise was a 3.5 percent jump in the energy index, partially reversing sharp declines in the fall. Over the last year, the energy index is still down 0.4 percent.

The core index rose 0.1 percent for the second consecutive month. It is up 2.0 percent over the last year. Core inflation continues to be driven primarily by shelter. The core index, excluding shelter, was flat in March after falling 0.1 percent in February. It is up 1.1 percent over the last year.

The annualized rate over the last three months (January, February, and March) compared with the prior three months (October, November, December) was 0.9 percent in the overall CPI. It was 2.3 percent in the core CPI but just 1.3 percent in the core index excluding shelter. This indicates that inflation is very well under control in most areas of the core index with the exception of rents, which continue to rise rapidly in many metropolitan areas.

There are large differences in rental inflation across metro areas, with the cities in the West seeing the sharpest increases. Owners’ equivalent rent (OER) rose by 7.1 percent in Portland over the last year with which data was available, 5.4 percent in Phoenix, 5.1 percent in Los Angeles, 4.9 percent in Seattle, and 4.7 percent in San Diego. (Owners’ equivalent rent is the better measure of pure rent since it excludes utilities.)

By contrast, OER rose by just 1.6 percent in Washington, DC, over the last year and 2.2 percent in New York. Rents in some lower-cost cities are now increasing considerably more rapidly, with OER rising by 2.8 percent in Baltimore, 3.0 percent in Houston, 3.6 percent in both Chicago and Minneapolis, 3.8 percent in Atlanta, and 4.2 percent in St. Louis. The sharp rises in rents in these low-cost cities could be evidence of some shift in economic activity in their direction.  

The OER index nationwide rose 3.3 percent over the last year, while the rent proper index rose 3.7 percent. (The OER index has more than three times the weight of the rent proper index in the CPI.) This gap shows up in most metro areas. For example, the rent index rose by 1.9 percent in Washington and 2.5 percent in New York. It rose by 4.4 percent in Baltimore and 5.6 percent in Los Angeles.

Outside of rents, there is very little in the core index that provides any basis for concerns about accelerating inflation. There were jumps in the prices of some components, but these largely reversed declines from last month. New vehicle prices rose 0.4 percent in March, but that followed a decline of 0.2 percent in February. They are up just 0.7 percent over the last year.

Prescription drug prices rose 0.6 percent in March following a decline of 1.0 percent in February. They are down 0.4 percent over the last year. Apparel is an anomaly in the opposite direction, with prices dropping 1.9 percent in March, following three months of prices not falling. Apparel prices are down 2.2 percent over the last year.

The car insurance index, which had been a major source of core inflation, fell by 0.1 percent in March. It is up by 1.7 percent over the last year. The medical care services index rose 0.3 percent in March after being flat in February. It is up 2.3 percent over the last year. Tuition and child care continue to be problems, with this index rising 0.5 percent in March and 3.4 percent over the last year.

It is very difficult to find any evidence of accelerating inflation in this report, with the possible exception of shelter costs. The story of rapidly rising rents is largely a West Coast story, although in the last couple of years a slowing of rent increases in some high-priced East Coast cities seems to have been offset by more rapidly rising rents in low-cost cities in the South and Midwest.