Core Inflation Creeps Higher in September

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October 17, 2007 (Prices Byte)

By Dean Baker

“Slow productivity growth and higher import prices could push inflation higher."

The core CPI inflation rate was 0.2 percent in September, largely in line with expectations. The September figure brought the annual rate of inflation in the core over the last three months to 2.5 percent, slightly higher than the 2.1 percent rate over the last year. The overall CPI rose by 0.3 percent for September, driven by a 0.3 percent rise in energy prices and a 0.5 percent rise in food prices. The overall CPI has risen at just a 1.0 percent annual rate over the last three months, down from a 2.8 percent rate over the last year.

There were a number of anomalies in the September data. On the high side, hotel costs rose by 1.0 percent, more than reversing a 0.6 percent drop in August, and the apparel and recreation components both increased by 0.3 percent. Apparel prices have fallen 1.8 percent over the last year. The September rise followed a 0.5 percent fall in August. Apparel prices may level off, but are unlikely to rise by much in the foreseeable future. The recreation component had been virtually flat over the last year. The September rise follows declines of 0.1 percent the prior two months. It also is not likely to be repeated.

On the low side, new car prices fell by 0.3 percent. This is likely to be reversed in the months ahead, with car prices on a flat or perhaps slightly downward price path. Tuition costs fell by 0.3 percent, the first decline since a 0.3 percent drop in August of 1998. This drop is also likely to be reversed in the months ahead. Medical care costs increased by a relatively low 0.3 percent, but this followed rises of 0.6 percent and 0.5 percent in July and August, respectively. Medical care costs have increased at a 4.6 percent rate over the last year and are likely still on this path.

Owners’ equivalent rent (OER) and rent proper both increased by 0.3 percent in September. The rent proper index is being pushed higher in part by utility costs. The September rise in the OER index is likely somewhat of an anomaly, with inflation in the index likely to be somewhat lower in the near future.

There continues to be a mixed picture on inflation at earlier stages of production. The overall finished goods index rose by 1.1 percent in September, driven by increases of 1.5 percent in food prices and 4.1 percent in energy prices. However, the core finished goods index rose by just 0.1 percent. The core index has increased at a 1.5 percent annual rate over the last three months, while the core consumer goods index has risen at a somewhat more rapid 2.4 percent annual rate. The overall finished goods index has increased at a 1.4 percent annual rate over the quarter, down from a 4.4 percent rate over the last year.

The overall intermediate goods index rose by 0.4 percent in September, driven by a 1.4 percent rise in food prices and 1.1 percent rise in energy prices. The core intermediate goods index rose by just 0.1 percent after falling by 0.5 percent in August. It has fallen at a 0.5 percent annual rate over the last three months. The core index is up 1.7 percent from its year ago level, while the overall index is up 4.2 percent. The crude goods index rose by 0.1 percent in September, while the core index rose by 1.6 percent. The core crude goods index has risen at a 12.4 percent rate over the last quarter, while the overall index fell at a 6.6 percent rate.

On the whole, the price data in September certainly provides no immediate concerns about runaway inflation, but there is also no evidence that inflation is slowing. The core rate of inflation in the CPI remains slightly higher than the Fed’s 2.0 percent target. With the falling dollar pushing up import prices (prices of goods from China have risen at a 4.0 percent annual rate over the last quarter) and productivity growth remaining weak, it is likely that inflation will inch higher in the immediate future.


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 [at] cepr [dot] net.