September 16, 2009
September 16, 2009 (Prices Byte)
By Dean Baker
September 16, 2009
The housing glut continues to hold down inflation.
The overall CPI rose by 0.4 percent in August, driven by a 4.6 percent jump in energy prices. The core CPI increased by just 0.1 percent for the second consecutive month. The overall CPI has risen at a 4.9 percent annual rate for the last quarter, compared to a drop of 1.5 percent over the last year. The core CPI has risen at a 1.6 percent annual rate over the quarter, almost identical to its 1.4 percent rate of increase over the last year.
There were few notable anomalies in the data. The price of new vehicles was reported as falling 1.3 percent, which presumably reflects the timing of sales. This knocked close to 0.1 percentage point off the core rate of inflation for the month. Hotel prices reportedly rose 0.5 percent in August after falling 7.8 percent over the last year.
Even with this jump in hotel prices, shelter costs rose just 0.1 percent. The record housing vacancy rate, together with a glut of hotel rooms, is keeping shelter costs from rising. In fact, the inflation rate in the shelter component over the last quarter has been zero. This has been a big factor in depressing the core inflation rate. Apart from shelter, the core rate of inflation rose at a 2.2 percent annual rate over the last quarter.
The inflation in the core comes largely from the usual sources. Health care costs rose 0.3 percent in August and have risen at a 2.7 percent rate over the last quarter. Education costs rose 0.5 percent for the month and have risen at a 5.8 percent annual rate over the quarter. Tobacco costs rose just 0.1 percent in August, but have risen at a 13.2 percent rate over the quarter, driven by higher taxes. This increase added almost 0.2 percentage points to the core inflation rate over the quarter.
There are some signs in the August producer price indexes and import/export price index that inflation could be edging upward in future months. The overall finished goods index in the PPI rose by 1.7 percent in August, driven by sharply higher food and energy prices. However, even the core index rose by 0.2 percent. The overall finished goods index has risen at a 10.4 percent annual rate in the quarter, while the core index has risen at a 2.4 percent rate.
The overall intermediate goods index rose 1.8 percent, while the core index increased 0.6 percent. The overall crude goods index rose 3.8 percent, with the core crude goods index rising by 6.0 percent. On the import side, non-fuel import prices rose 0.6 percent. Most of the increase was in raw material prices, but prices of many manufactured goods are also rising.
For the most part, these recent price increases are just reversing price declines that took place late last year or early this year. The finished goods index is still 12.3 percent below its year ago level, while the core index is 2.3 percent higher. The core intermediate goods index is down 8.2 percent, while the core crude goods index is down 30.0 percent from year ago levels.
However, the path going forward is likely to be one in which rising commodity prices and import prices do put some upward pressure on the overall inflation rate, with at least some of the price pressure showing up in the core indexes. This will have two important implications for the recovery. First the higher inflation, even if it still modest, may lead to growing fears in financial markets that could send interest rates higher. Ironically, the source of inflation has nothing to do with expansionary fiscal and monetary policy, but any uptick in inflation may increase political pressure to tighten policy.
The other problem is simply that higher inflation will erode wages, leaving workers with less money to spend. In the context of an economy that is likely to be losing jobs at least into the first months of 2010, the prospect of declining real wages does not augur well for consumption growth.
Dean Baker is Co-Director of the 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 email, contact CEPR at 202-293-5380 ext. 102 or email [email protected].
