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Home Publications Data Bytes Prices Bytes Core Inflation Edges Higher in August

Core Inflation Edges Higher in August

September 19, 2007 (Prices Byte)

By Dean Baker

“The price of imports from China has risen at a 4 percent rate over the last quarter.”

The core inflation rate was 0.2 percent in August driven by large increases in the cost of medical care and education. This is the third consecutive month that the core index has risen by 0.2 percent, bringing the annual rate of inflation in the core index over the last quarter to 2.5 percent. This is up slightly from a 2.1 percent rate over the last year. The overall CPI fell by 0.1 percent in August, driven by a sharp decline in energy prices. The overall index has grown at just a 0.7 percent rate over the last quarter, down from a 2.0 percent rate over the last year.

Medical care costs rose 0.5 percent in August following a 0.6 percent jump in July. They have risen at annual rate of 5.6 percent over the quarter, up from a 4.5 percent rate for the last year. Education costs also rose by 0.5 percent in August. They have risen at a 5.1 percent annual rate for the quarter, almost the same as the 5.5 percent rate over the last year.

On the low side, apparel prices fell by 0.5 percent in August, bringing the rate of price decline for this component over the last quarter to 2.8 percent. It is likely that apparel prices will rise slightly or at least flatten in the months ahead. Both rent indexes rose by 0.2 percent in August, with price increases held down by the glut in the housing market. The owners’ equivalent rent index has risen at a 2.4 percent annual rate over the last quarter. The rent proper index, which includes utilities costs, has risen at a 2.9 percent annual rate.

There is mixed evidence on inflationary pressures at earlier stages of production. The overall finished goods index fell by 1.4 percent in August, due to a 6.6 percent plunge in energy prices. The core index finished goods index rose by 0.2 percent. The core finished goods index has increased at a 2.5 percent annual rate over the last quarter, slightly higher than its 2.2 percent rate over the last year.

The overall intermediate goods index fell 1.2 percent in August while the core index dropped 0.5 percent. The core intermediate goods index has risen at just a 0.7 percent annual rate over the last quarter. It is 1.6 percent above its year ago level. The overall crude goods index fell by 3.0 percent in August, but the core index rose by 1.2 percent. The core index has risen at a 4.7 percent rate over the last quarter compared to a 1.2 percent rate over the last year.

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 continue to be somewhat above the Fed’s 2.0 percent target in the months ahead, as health care and education costs sustain their current rate of increase. If anything, there is a risk that inflation could edge somewhat higher since apparel prices are likely to be rising somewhat faster in the next few months, or at least not falling as fast. In addition, with the decline in the dollar, the price of many imported goods is now rising.

This is especially striking with the prices of goods from China, which have risen at a 4.0 percent annual rate over the last quarter. Prior to last year, the price of imports from China had been flat or falling. A combination of China’s domestic inflation and the modest decline in the dollar against the yuan has now reversed this situation. While goods from China had been an important force restraining inflation in the United States, it now looks that they may be contributing to inflation in the years ahead.


Dean Baker is co-director of Center for Economic and Policy Research in Washington, DC. CEPR's Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and the producer price indexes. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102 or morgavan@cepr.net.

 

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