July 17, 2012 (Prices Byte)

By David Rosnick

Core inflation increased by just 0.2 percent as trade prices fell

Following a May fall of 0.3 percent in the Consumer Price Index, headline inflation did not change last month as energy prices didn’t fall as much as previously. Energy prices have decreased 7.3 percent over the last three months and are now 3.9 percent below the level of last June. Food prices rose 0.2 percent in June and at a 1.7 percent annualized rate over the last three months.

The core rate of inflation—consumer prices outside of food and energy—rose 0.2 percent for the fourth consecutive month and at a 2.6 percent annualized rate since March. Within core purchases, the prices of rent and owners’ equivalent rent each rose 0.1 percent.

These services account for 40 percent of the core index and 30 percent of the broader measure of inflation. Over the past year, owners’ equivalent rent rose 2.0 percent, while rent proper rose 2.7 percent. This difference may reflect landlords passing on earlier increases in utility prices, though in theory this measure should not include such energy costs.

This month’s data provide a little additional evidence in support of last month’s speculation that the price of used cars and trucks has been adjusted incompletely for the season. Used car prices were unchanged in June, and despite increases of at least 1.0 percent in the previous three months, prices are only 2.3 percent above their level one year ago. By contrast, the price of new vehicles rose 0.2 percent for the second consecutive month and is up 0.9 percent since June 2011.

The price of hospital services jumped 1.2 percent last month and has risen 5.8 percent in the last 12 months. Hospital services continue to be a major driver of medical price inflation. Though they account for a much smaller portion of the overall index of inflation, nursing home and invalid care prices have grown much more slowly over this period—3.8 percent and 0.9 percent, respectively. On the other hand, professional medical services rose 0.4 percent in the last month and 2.0 percent over the last year.

Moderation in medical prices will be critical to keeping the long-run deficit in check. If the United States spent on health care comparably to any country with a longer life expectancy, there would be no long run fiscal crisis other than the prospect of unending surpluses.

The Producer Price Index for finished goods rose 0.1 percent in June. A 0.9 percent fall in finished energy goods more than balanced the 0.5 percent rise in finished food prices. The core index of finished goods rose 0.2 percent for the fourth consecutive month — a 2.2 percent annualized rate of inflation. Over the last 12 months, the price of finished capital goods rose at a slightly slower pace, growing 1.9 percent in that time.

At earlier stages of production, the producer price data show continued price declines. The price of core intermediate goods fell 0.7 percent in June after a 0.2 percent fall in May. For the third consecutive month, core crude prices fell—4.0 percent in June alone.

Not too much should be read into these declines, as later-stage producers pass along only some of these fluctuations. However, this data show that there is generally little to no price pressure coming from these earlier stages of goods production.

Trade prices fell sharply in June as the import price of petroleum fell 10.5 percent and the export price of agricultural commodities fell 4.0 percent in the month. However, core prices in both imports and exports also fell—0.3 percent and 0.7 percent, respectively. The easing of both import and export inflation is consistent with a rising dollar, which has bounced up 7.0 percent in the last 12 months.

Once again, this month’s report shows little sign of building inflation. With the economy still weak and the dollar rising, there is no reason to think that rising prices will pose a significant threat. Rather, low inflation combined with stagnant wages will continue to make it more difficult for families to pay their debts.

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