January 16, 2008 (Prices Byte)
By Dean Baker
“Inflation outpaced wage growth by two percentage points over the last quarter."
The core inflation rate was 0.2 percent in December, bringing the annual rate of inflation in the core over the last three months to 2.7 percent. This is up from 2.4 percent over the last year. The inflation rate in the overall CPI was 0.3 percent, driven by a 0.9 percent jump in energy prices. Over the last three months, the overall CPI has risen at a 5.6 percent annual rate. This is more than two percentage points higher than the rate of nominal wage growth over this period. Over the last year, the CPI has risen at a 4.1 percent rate.
There was very little that can be viewed as anomalous in the December CPI. Public transportation, a core component, rose by 1.2 percent. This was driven by a 1.6 rise in airfares, which in turn was largely the result of higher fuel prices. Tobacco products, which account for 1.0 percent of the core index, rose a higher than usual 0.8 percent in December.
However, apart from these two categories, most of the other components in the core index seem to be moving in a pattern consistent with their underlying trends. The major forces pushing the rate of inflation higher continue to be medical care and education. Medical care costs rose by 0.3 percent in December. They have risen at a 5.1 percent annual rate over the last quarter and 5.2 percent for the last year. Education costs rose 0.5 percent in December, bringing the rate of increase over the last quarter to 7.7 percent, up from the 5.6 percent rate over the last year.
Both rent proper and owner equivalent rent have been rising somewhat more rapidly in recent months. The rent proper index rose by 0.4 percent in December. It has risen at a 5.0 percent rate over the last three months compared with a 4.0 percent rate over the last year. The owners’ equivalent rent component rose by 0.3 percent in December, bringing its rate of increase over the last quarter to 3.4 percent. This is up from a 2.8 percent rise over the last year. The main reason for the difference between the two indices is that the rent proper index includes utilities, the price of which has risen along with energy prices.
The producer price indexes also provide evidence of moderately higher inflation. The overall finished goods index fell 0.1 percent in December due to a 1.9 percent drop in energy prices, but the core index rose by 0.2 percent. The core finished goods index has increased at a 2.2 percent annual rate over the last quarter, up from a 2.0 percent rate over the last year. The core consumer goods index has risen at a 2.8 percent annual rate over the quarter, up from a 2.5 percent rate over the last year.
The inflation situation is worse at earlier stages of production. The overall intermediate goods fell by 0.2 percent in December, while the core index was flat, but over the last three months they have risen at a 4.6 percent and 15.0 percent annual rate, respectively. The overall crude goods index rose by 1.0 percent, while the core index was flat. Over the last three months these indices have risen, respectively, at 59.6 percent and 3.6 percent annual rates.
Part of the story here continues to be rising import prices. Non-fuel imports have risen at a 4.8 percent annual rate over the last three months. Importers appear to have given up their reluctance to pass along prices increases, with import prices now rising from almost everywhere. Even prices from China are now rising at more than a 2.0 percent annual rate after falling for years.
With the economy weakening, but core inflation already above the Chairman Bernanke’s 2.0 percent target, the Fed will have to make a choice between the inflation target and trying to prevent the downturn from becoming too severe. It is also important to remember that the non-core inflation does deplete purchasing power, even if it is not the focus of monetary policy.
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.