CEPR

June 12, 2019 (Prices Byte)

By Dean Baker

Core inflation, excluding shelter, rose at an annualized rate of just 0.1 percent over the last three months.

Inflation remained well-contained in May, with no evidence of serious inflationary pressures outside of rent. The overall Consumer Price Index (CPI) rose just 0.1 percent in May as the sharp rises in energy prices in the prior two months were partially reversed with a 0.6 percent drop in the energy index. Over the last year, the CPI is now up by 1.8 percent.

The core index was also up by 0.1 percent in May for the fourth consecutive month. It is up by 2.0 percent over the last year. Insofar as there is any inflation at all in the core index it continues to be largely a story of rising rents. The core index, excluding shelter, was flat in May. It is up just 1.0 percent over the last year.

Inflation appears to be stable or falling in both of these core indexes. The annualized rate of inflation in the core, comparing the last three months (March, April, and May) with the prior three months (December, January, February), was just 1.7 percent. For the core index, excluding shelter, the annualized rate was 0.1 percent.

Inflation was low or negative in the major areas of the CPI, apart from shelter. New vehicle prices were up 0.1 percent in May and have risen 0.9 percent over the last year. Used vehicle prices were down 1.4 percent in May and have risen just 0.3 percent since May of last year. Apparel prices were flat in May and are down 3.1 percent over the last year.

Tobacco prices, which account for 0.8 percent of the core CPI, rose by 0.4 percent in May and were up 4.6 percent over the last year. This is largely by design as states are raising tobacco taxes to discourage smoking.

Medical costs, in general, remain well-contained with the overall medical care index rising 0.3 percent in May, bringing the increase over the last year to 2.1 percent. Prescription drug prices actually fell 0.2 percent in May and have now fallen by 1.0 percent over the last year. It is important to remember that the CPI is only measuring the change in the prices of drugs already on the market. New drugs, which may carry very high prices, do not affect the index.

Health care insurance is an exception. Insurance costs rose 1.5 percent in May, bringing the increase over the last year to 12.4 percent. The CPI is not measuring premiums, but rather the administrative costs and profits of insurers, which are now by far the fastest rising component of the CPI.


Education also is somewhat of a problem, with the education index rising 0.2 percent in May and 3.2 percent over the last year. Tuition costs are the main story with college tuition rising 0.2 percent in May and 3.8 percent over the last year. Interestingly, textbook prices are now falling, dropping 0.7 percent in May and 4.2 percent over the last year.

Rent continues to be the biggest inflation factor in the CPI. Rent proper rose 0.2 percent in May and is up by 3.7 percent over the last year. Owners’ equivalent rent (OER) rose 0.3 percent and has risen 3.3 percent over the last year. The main reason for the difference in the indices is the rent proper index includes the cost of utilities that are paid with rent by tenants. The OER index only measures the rental value of a home.

This is again a very positive report from the standpoint of being concerned about accelerating inflation with a low unemployment rate. Inflation remains low and stable in almost every major area of the CPI. Rents are a problem, but this is more an issue of zoning constraining supply than a question of rising costs. Education is again a problem area, although the inflation rate in this component is still far lower than in the pre-recession period. Health care insurance does show an out-of-control rate of inflation, but this is largely a regulatory issue. On the whole, in spite of a 50-year low unemployment rate, inflation is not a problem.