December 15, 2006 (Prices Byte)
By Dean Baker
Car prices shaved 0.6pp off the core inflation rate in the last three months.
Both the overall and core (excluding food and energy) consumer price indices were unchanged in November. The consensus forecast was that both indices would show a 0.2 percent increase. The overall CPI has now fallen at a 3.9 percent annual rate in the last three months, compared to an increase of 2.0 percent over the last year. The core CPI has risen at a 1.6 percent annual rate over the last three months, down from a 2.6 percent rate over the last year.
There were several anomalies that were important in depressing the core inflation rate for November. At the top of this list was a 0.8 percent decline in car prices. This undoubtedly reflects the large discounts that the domestic manufacturers are offering to reduce their inventories. Vehicle prices have declined at a 5.7 percent annual rate over the last quarter. This drop is likely to be partially reversed in the months ahead. (New and used vehicles account for 10.2 percent of the core index.
Airfares fell by 4.8 percent in November, reflecting the drop in fuel prices. Airfares have fallen at a 27.1 percent annual rate since July. Wal-Mart’s $4 prescription drug policy seems also to be having an effect on the CPI. The index for drugs fell by 0.7 percent in November. There was also an extraordinary drop of 4.2 percent in the information technology component, which presumably reflects extraordinary Christmas discounts. This component has declined at a 30.8 percent annual rate over the quarter, compared to a 13.0 percent decline over the last year.
Both tobacco and personal care products posted unusual price declines in November, with each component falling by 0.3 percent. Both have a weight of approximately 1.0 percent in the core CPI.
The only obvious anomaly on the high side was a 1.0 percent rise in hotel prices. These have risen at a 4.8 percent annual rate over the last quarter, only slightly higher than their 4.4 percent rate over the last year. Rental inflation continues to slow, reflecting the impact of record nationwide vacancy rates. Owners’ equivalent rent (OER) rose by 0.3 percent in November, bringing its annual rate of increase for the last three months to 4.1 percent. This is down from an annual rate of increase of 5.6 percent in the three months ending in May. The index for rent proper, which is one-fourth the weight of OER in the CPI, rose by 0.4 percent. It has risen at a 4.9 percent annual rate over the last quarter. This higher increase partly reflects the cost of utilities, which are not included in OER.
The producer price index will not be released until next week, but the data on import and export prices suggest that inflationary pressures are continuing to weaken at earlier stages of production. Non-fuel import prices rose by 0.1 percent in November, after falling by 0.1 percent in October. However, they are still 2.8 percent higher than year ago levels. Non-fuel import prices fell in 2002-2003. Non-agricultural export prices rose by 0.1 percent in November, after falling energy prices pushed the index down by 0.4 and 0.5 percent in September and October, respectively. This index is up 3.4 percent over the last year.
The inflation data for November appear to indicate that the inflationary pressures from the spring and summer have largely dissipated. The slower growth in rental inflation is especially striking, since the two rental components together account for almost 40 percent of the core CPI. However, several of the price declines that have held down inflation in November, as well as the prior two months, are clearly anomalies that will not be repeated and may be partially reversed in the months ahead. The drop in car prices tops this list, but the recent decline in air fares and drug prices will also not persist. Core inflation is still likely to be near 2.5 percent in future months, when these one-time events are no longer holding down the inflation rate.
Dean Baker is Co-director of Center for Economic and Policy Research in Washington, D.C.
Prices Byte is published each month upon release of the Bureau of Labor Statistics’ reports on the consumer price and the producer price indexes.