February 21, 2007 (Prices Byte)
By Dean Baker
A glut of vacant units is holding down rents.
An extraordinary 0.8 percent jump in medical care costs led to a higher than expected 0.3 percent core inflation rate in January. The overall inflation rate for January was 0.2 percent, as a 1.5 percent fall in energy prices more than offset a 0.7 percent increase in food prices in January. The annual inflation rate in the core over the last three months has been 2.0 percent, down from a 2.7 percent rate over the last year. The overall inflation rate has been 2.7 percent over the last three months, up from 2.1 percent over the last year.
The jump in medical care costs reported for January will not be repeated, but it suggests that the moderation in medical care inflation reported in prior months’ price data was an anomaly. With the January jump, the annualized rate of inflation over the last three months is 5.0 percent, compared to a 4.3 percent rate over the last year. The rate of inflation in medical care going forward will probably be close to 4.0 percent.
There were a number of other anomalous numbers in this report, which were largely offsetting. On the high side, tobacco costs jumped 3.1 percent in January and hotel prices rose by 1.1 percent, bringing the annual inflation rate in these components over the last quarter to 18.3 percent and 8.4 percent, respectively. Both series are very erratic (tobacco costs probably reflect new taxes put in place in January), and are likely to show much lower inflation in future months.
On the low side, communication costs fell by 0.4 percent in January, bringing their annual rate of decline over the last three months to 5.7 percent. This compares to a 2.0 percent rate of decline over the last year. It is likely that some of the recent price declines will be reversed. Tuition costs rose by just 0.1 percent in January, after rising 5.8 percent over the last year. Tuition will almost certainly rise more rapidly in the months ahead.
Rental inflation continued to moderate in January. The owner equivalent rent component, which accounts for more than 30 percent of the core CPI, rose by just 0.2 percent. The annual inflation in this component over the last three months has been 3.5 percent. This is down from a rate of more than 5.0 percent last spring. The downward trend is undoubtedly attributable to the nationwide glut of vacant units, especially ownership units. Many homeowners are being forced to rent out houses that they are unable to sell after they move. The rent proper component rose by 0.4 percent in January, bringing its inflation rate to 4.8 percent over the quarter. This higher rate reflects the impact of utility costs being passed on in rent.
Car prices fell 0.2 percent in January and have fallen at a 4.4 percent annual rate over the quarter. Car prices are likely to flatten or rise modestly in the months ahead.
There is little evidence of inflationary pressures at earlier stages of production. The overall finished goods index fell by 0.6 percent in January, while the core index rose by 0.2 percent. The core finished goods index has increased by 1.8 percent over the last year, which is probably close to its current underlying rate. The core intermediate goods index was flat for the second consecutive month in January, after falling 0.4 percent in November. Weakness in the prices for many industrial supplies, notably construction, is containing inflation in this index.
The overall inflation picture remains somewhat mixed. There is no evidence that inflation poses any serious problem, but it is likely that the core inflation rate will be near the Fed’s 2.0 percent target in the months ahead, as rising health care and tuition costs are not offset by sharply falling car and communications prices. The revised productivity data that will be released next month, which will show substantially slower productivity growth for both the last quarter and the last year, is likely to raise concerns over the future course of inflation.