August 14, 2008 (Prices Byte)
By Dean Baker
"The annual rate of inflation in the CPI has been 10.6 percent over the last quarter."
The core CPI rose 0.3 percent in July, as a 1.2 percent jump in apparel prices, coupled with unusually large increases in communication and recreation prices led to a larger than expected increase. The core index has now increased at a 3.5 percent annual rate over the last quarter, up from a 2.5 percent rate over the last year.
The overall CPI increased by 0.8 percent in July. It has risen at an extraordinary 10.6 percent rate over the last quarter, compared with a 5.6 percent rate over the last year. A 4.0 percent jump in energy prices was the biggest factor pushing up the core index, but food prices also rose by 0.9 percent.
The jump in apparel prices is not surprising, given the extraordinary increases in import prices in recent months. The July increase undoubtedly overstates the true rate of inflation, but the years of falling apparel prices are over.
Recreation costs had been nearly flat, so the 0.4 percent increase reported for July was extraordinary. Communications costs rose 0.5 percent after rising 0.6 percent in June. In the past, communication costs had largely offset rapidly rising education costs. Now they are both rising at about the same rate.
The producer price data for July will not be released until next week, but the import price data suggest that price pressures are continuing at earlier stages of production. Non-oil import prices rose 0.9 percent in July and have risen at a 9.6 percent annual rate over the last quarter. This is up from an 8.0 percent rate over the last year.
The rise in import prices is across products and across countries. The price of consumer goods other than autos rose by 0.3 percent in July. These import prices had been falling until a couple of years ago. The price of imported capital goods rose by 0.3 percent in July. Imported capital goods prices are still 6.5 percent below their 2000 level. The price of goods imported from the European Union rose by 0.7 percent in July and have risen at an 8.8 percent annual rate over the last quarter. The price of imports from China rose 0.9 percent in July. They have also risen at an 8.8 percent annual rate over the last quarter.
There is a similar story on the export side. Non-agricultural export prices rose by 0.8 percent in July. They have risen at an 8.4 percent rate over the last quarter. This is up from a 7.5 percent rate over the last year. The largest increase was in the category of non-agricultural industrial supplies, the price of which rose by 2.6 percent in July and has risen at a 24.0 percent annual rate over the last quarter. The price of exports of consumer goods rose by 0.4 percent in July, although prices in this category have increased at just a 2.0 percent annual rate over the quarter.
There continues to be considerable inflationary pressure at early stages of production and in import prices. It appears that this is now showing up in both the core and overall rate of inflation. The weakness of the labor market has led to slowing wage growth and recent productivity growth has been respectable, but price pressures are likely to lead to a somewhat more rapid core rate of inflation through the rest of this year and into 2009.
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.