August 15, 2007 (Prices Byte)
By Dean Baker
The core CPI, excluding owner occupied housing, rose at a 2.8 percent rate in the quarter.
The overall CPI rose by just 0.1 percent in July, as a 1.0 percent drop in energy prices held down the overall rate of inflation. The core (excluding food and energy) rate of inflation was 0.2 percent for the second consecutive month. The annual inflation rate over the last quarter in the overall CPI has been 4.0 percent. This is up from a 2.4 percent rate over the last year, and just about even with the rate of wage growth over the last quarter, meaning that real wages have been flat. The core inflation rate over the quarter has been 2.5 percent, up slightly from the 2.2 percent rate over the last year.
Housing continues to be an important factor holding down the core rate of inflation. The owners’ equivalent rent (OER) component, which accounts for 30 percent of the core index, has increased at just a 1.8 percent rate over the last quarter. Excluding OER, the core inflation rate was 2.8 percent over the last quarter. The rent proper index showed a somewhat higher 3.3 percent rate of increase over the quarter, but this index is pushed up by the cost of utilities that are included with rent.
The one component showing a big jump in July was medical care costs, which rose by 0.6 percent. Part of this increase is attributable to an unusually low 0.2 percent reported rise in June. Medical care costs have risen at a 4.8 percent annual rate over the last quarter, which is only slightly higher than the 4.3 percent rate of increase over the last year.
Apparel prices rose by 0.4 percent, but this was predictable after five consecutive months of sharp declines. Over the quarter, apparel prices have fallen at a 1.9 percent annual rate. This is considerably more than the 0.3 percent rate of decline over the last year, so it is likely that there will be further price increases in apparel in the months ahead.
There were few other notable anomalies in this month’s report. Education prices rose by 0.5 percent after rising just 0.2 percent in June. The rate of increase in education costs over the quarter has been 5.0 percent, down slightly from the 5.7 percent rate over the last year. New car prices were flat for the second consecutive month. They have fallen at a 0.8 percent annual rate over the quarter, almost identical to the 1.1 percent rate of decline over the last year.
The producer prices indexes continue to show a mixed picture. The overall finished goods index jumped 0.6 percent in July, but this was driven by a 2.5 percent rise in energy prices. The core index rose by just 0.1 percent. Still, there is some evidence of rising price pressure in the core index. The core finished consumer goods index rose at a 2.4 percent rate over the last year. It has risen at a 3.4 percent annual rate over the last three months. There is a similar story with the core intermediate goods index. It rose by just 0.2 percent in July, but it has risen at a 4.4 percent annual rate over the last quarter, up from a 2.4 percent rate over the last year.
These numbers certainly do not imply runaway inflation, but they do suggest that the inflation rate may edge higher in the months ahead. This is especially likely if the recent productivity slowdown persists. With productivity growth in a range near 1.5 percent, it will be difficult to offset higher input prices. This means that higher inflation at the producer price level will be more likely to be passed on to consumers.
Core inflation is clearly somewhat higher than the 1.0-2.0 percent zone that the fed has targeted and it is likely to edge somewhat higher in the near future. However, it clearly is not accelerating at a rapid pace. With a large amount of evidence showing that the economy is weakening, the Fed will have to make a decision as to whether it will place a greater priority on its inflation target or sustaining a healthy economy.