March 16, 2007 (Prices Byte)
By Dean Baker
The rapid rise in food prices may be permanent.
The CPI rose by 0.4 percent in February, driven by large jumps in food and energy prices. The February jump brought the annual rate of inflation over the last three months to 4.0 percent, up from 2.4 percent over the last year. The core (excluding food and energy) index rose by 0.2 percent. The annual rate of inflation in the core has been 2.6 percent over the last quarter, almost identical to the 2.7 percent rate over the last year.
While the core index usually gets the most attention, it is worth noting that the recent increases in food prices may stick, rather than just being a random fluctuation. Food prices have risen at a 5.9 percent annual rate over the last quarter and 3.1 percent rate over the year. The producer price indexes also show rapid increases in food prices. The foods component of the finished goods index has risen by more than 1.0 percent in each of the last three months and is up 6.8 percent over the year. The annual rates of inflation over the last three months in the food components of the intermediate and crude goods indexes have been 26.8 percent and 44.6 percent, respectively. The increasing use of corn for ethanol, as well as increased export volume, could lead to permanently higher food prices.
The two major components driving the rise in the core index were apparel and medical care, both of which rose by 0.5 percent in February. The rise in apparel prices is somewhat of an anomaly. Apparel prices clearly will not continue to rise at such a rapid rate, however, they may now be on an upward path. After falling consistently for almost a decade, apparel prices now stand 2.1 percent above their year ago level. With most of the gains from cheaper imports and discount retailers having been realized, there may be little opportunity for further reductions in apparel prices, especially if the dollar falls in value.
The rise in medical care prices suggests that the moderation in medical care inflation in the fall was an aberration. Medical care prices have risen at a 6.0 percent rate over the last quarter and 4.3 percent over the last year.
The glut of vacant units continues to put downward pressure on rents. Owners’ equivalent rent (OER) rose by 0.3 percent in February, bringing its annual rate of increase over the last quarter to 3.2 percent. OER had been rising at close to a 5.0 percent rate in the spring of last year. The rent proper index rose by 0.4 percent in February. It has risen at a 5.1 percent rate over the last quarter. The difference in the indexes is attributable to the fact that the rent proper index includes utilities.
The producer price indexes also showed some evidence of growing inflationary pressure. The overall finished goods index jumped 1.3 percent in February, but even the core index rose 0.4 percent. The core finished goods index has risen at a 3.0 percent annual rate over the last quarter. The core finished consumer goods index has risen at an even more rapid 3.4 percent rate over this period. The core intermediate goods index has been tamer, rising just 0.2 percent in February, bringing its inflation rate to 0.7 percent over the last quarter. But the core crude goods index rose 2.7 percent in February and has risen at a 21.4 percent annual rate over the quarter.
These reports provide reason to believe that inflation may be somewhat higher than the Fed’s comfort zone in the months ahead. There is little reason to believe that core inflation will dip lower and if higher prices at the producer level get passed through, inflation may tick upwards. Also, the weak productivity growth of the last year eliminates an important force dampening inflation. The rise in gas prices in March virtually guarantees another jump in the overall CPI. If workers are able to secure wage increases to compensate for higher gas and food prices, then there will be another source of pressure on core inflation.
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.