October 16, 2008 (Prices Byte)
By Dean Baker
“Beneficiaries will have the largest Social Security cost of living adjustment (COLA) in more than a quarter century.”
The overall Consumer Price Index was unchanged in September after falling 0.1 percent in August. The core CPI rose by just 0.1 percent after a 0.2 percent increase in August. Over the last quarter, the CPI has risen at 2.6 percent annual rate, down from a 4.9 percent rate of increase over the last year. The core CPI has risen at a 2.7 percent annual rate, up slightly from the 2.5 percent rate over the last year.
Many of the sources of higher inflation in prior months appear to have evaporated in the last two months. This is the case not only with energy prices, which dropped sharply for the second consecutive month, but also with a wide range of other products.
For example, new car prices, which had been close to flat in the summer months, fell 0.6 percent in August and 0.7 percent in September. Clearly, manufacturers feel the need to lower prices sharply in the wake of plunging sales. Inflation other goods and services” has been just 0.2 percent for the last two months. Prices in this sector had been increasing at a 4.8 percent annual rate in the first half of the year.
Inflation in the recreation component was just 0.2 percent in September. It had been 0.4 percent in July and 0.5 percent in August. Apparel prices fell by 0.1 percent in August after rising sharply in prior months, although this could just be an erratic jump.
The glut in housing continues to kept rents under control, with the rent proper component rising by 0.3 percent, while owners’ equivalent rent (OER) rose by 0.2 percent. The OER component has risen at just a 1.9 percent annual rate over the last quarter.
One area where inflation appears to be increasing is medical care. Medical care prices rose by 0.3 percent in September, the highest increase since a 0.5 percent rise in January. There are no other major areas where inflation appears to be accelerating.
This release allows for the calculation of the annual cost of living adjustment (COLA) for Social Security. The increase in the CPI-W from the 3rd quarter of 2007 to the 3rd quarter of 2008 was 5.8 percent. This is the largest COLA for Social Security since a 7.4 percent increase in 1982.
Inflationary pressures also appear to be easing at earlier phases of production. The overall finished goods index fell by 0.4 percent as a result of a 2.9 percent drop in energy prices. The core finished goods index rose by 0.4 percent. Over the last quarter the core finished goods index rose at a 5.4 percent annual rate.
However, the September jump seems to be largely a pass-through from price increases in prior months. The core intermediate goods fell 0.3 in September and the core crude goods index fell 9.4 percent, following a drop of 1.9 percent in August. This reflects the world-wide drop in commodity prices over the last two months.
Import prices have also reversed their recent run-up and are now falling in response to both weak demand and the rise in the value of the dollar. Non-oil import prices fell 0.9 percent in September following a drop of 0.5 percent in August. The price pressure that had been coming on the import side has essentially vanished in the last two months.
However, this is only a temporary reprieve. The higher dollar is likely to reverse the recent progress on the trade deficit, which has provided an important lift to the economy over the last year. The trade deficit is running at more than a $700 billion annual rate. It is not sustainable and the dollar will eventually have to fall to bring the deficit down to a sustainable level.
For the moment, the weakness of the economy should remove any basis for concern about inflation. There may still be some increases in the pipeline due to higher energy and import costs, but with these prices now headed downward, inflation will moderate quickly.
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 warner [at] cepr [dot] net.