Higher Oil Prices Cut into Workers' Income

May 18, 2005

May 18, 2005 (Prices Byte)

Prices Byte

Higher Oil Prices Cut Into Workers' Income

May 18, 2005
By Dean Baker
The consumer price index rose by 0.5 percent in April, driven by sharp jumps in food and energy prices. This increase followed rises of 0.4 percent in February and 0.6 percent in March, bringing the annual rate of inflation in the CPI over the last quarter to 6.2 percent, the highest rate of increase since the onset of the recession in the fall of 1990. The sharp jump in prices is also seriously eroding workers’ purchasing power, with the real hourly wage now declining at almost a 4.0 percent annual rate, the fastest rate of decline since 1990.

Unlike March, the April price spike was driven entirely by higher food and energy prices.The core CPI (excluding food and energy) was unchanged in April. In contrast, energy prices rose by 4.5 percent, the third consecutive month of sharp increases, and food prices rose by 0.7 percent in April. The annual rate of inflation in the core index over the last three months has been 2.6 percent.

There were several anomalous factors holding down core inflation in this report. The index for lodging away from home fell 1.2 percent in April, following large jumps the prior two months. Apparel prices fell 0.6 percent, following a rise of 0.8 percent in March. Both of these indexes are highly erratic, in large part because of the difficulty of making seasonal adjustments.

Car prices fell 0.1 percent after a 0.4 percent drop in March. This is almost certain to reverse in months ahead, since car prices are on a modest upward trajectory at present. Medical care costs reportedly rose just 0.2 percent in April after considerably sharper rises the prior two months. The 5.1 rate of inflation in medical care over the last three months probably gives the better measure of the underlying inflation rate in this sector.

The “other goods and services” category, which accounts for 5 percent of the core CPI, also showed a surprisingly low zero rate of inflation for April. The rate of inflation for this component has been 2.0 percent over the last quarter.

The oversupply of rental housing also continues to hold down core inflation. Owners’ equivalent rent (OER), which accounts for almost 30 percent of the core CPI, rose by just 0.1 percent, while rent proper rose by 0.3 percent. In principle, the rent index is supposed to exclude utility costs, but it is difficult to accomplish this in practice, since utility costs are often included in rent. As a result, inflation in rental units tends to be higher than in the OER index when energy costs are rising, and it tends to be somewhat lower when energy costs are falling. In any case, both rental indexes have been lagging the overall inflation rate for more than two years, even as home sale prices continue to soar upward – perhaps the most decisive evidence of a housing bubble.  

The producer price indexes continue to show evidence of higher inflation at earlier stages of production. The overall finished goods rose by 0.6 percent in April, driven by a 2.1 percent rise in energy prices, while the core index rose by 0.3 percent. The overall and core intermediate goods indexes rose by 0.8 percent and 0.2 percent, respectively. The latter is the smallest advance in more than a year, the core intermediate goods index is 6.6 percent higher than its year ago level. The core finished goods index is 2.6 percent above its year ago level.

The data in these price reports provide further evidence that inflation is creeping upwards. The pressure is coming from higher input prices due to higher import prices and raw material prices driven up by increased world demand. However, the situation is virtually certain to worsen in the months ahead. While energy prices are likely to moderate, nominal wages will almost certainly start to increase more rapidly to make up for some of the recent pay cuts experienced by workers, also productivity growth is likely to be slower in the future than it has been the last few years. The result will be higher inflation.

Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.

CEPR’s Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and producer price indexes. 

Support Cepr


If you value CEPR's work, support us by making a financial contribution.

Si valora el trabajo de CEPR, apóyenos haciendo una contribución financiera.

Donate Apóyanos

Keep up with our latest news