May 13, 2011 (Prices Byte)
By David Rosnick
Inflation remains low, little concern over threat of rapid price increases
The Consumer Price Index rose 0.4 percent in April and at a 6.2 percent annualized rate over the last three months. Headline inflation continues to be driven in large part by rapid increases in energy prices—up 2.2 percent last month, and at a 42.8 percent annualized rate over the last three months as prices recover from their rapid fall in 2008. Energy prices fell 35 percent in just five months and currently stand at 7 percent below the peak in July of that year.
The core CPI rose 0.2 percent last month. In 2011, the monthly core rate of inflation has remained stable, varying between 1.6 and 2.4 percent annualized since December. In part, the low rate of core inflation continues to be a price restraint in rent and owners’ equivalent rents resulting from the bubble-driven oversupply of housing. The price of owners’ equivalent rents has risen 0.1 percent in each of the last seven months—a 1.2 percent annualized rate.
Transportation prices rose 1.4 percent in April, incorporating increased prices in motor fuels. The price of new vehicles has risen at an annualized 10.1 percent rate in the last three months, adding one-quarter of a percentage point to the 2.1 percent annualized core rate of inflation. However, manufacturers have changed when they introduce new cars and this will throw off the seasonal adjustment. The price of new cars has risen only 2.2 percent over the last year.
Elsewhere in core goods and services, the price of medical care rose 0.4 percent last month and at a 4.1 percent annualized rate over the last three. Medical care commodity prices—primarily prescription drug prices—have risen at a 6.8 percent annualized rate over the same period.
Apparel prices rose 0.2 percent in April. The volatile prices of clothing have fallen at a 4.9 percent annualized rate over the last three months, compared with a 4.9 percent annualized rate of inflation for the three months ending in January.
Finally, the prices of education and communication rose 0.1 percent last month. Their combination obscures the trends in each. Education prices have risen at a 1.4 percent annualized rate over the last three months, while communication prices have fallen at a 0.9 percent rate. This difference in inflation is not new—education prices have risen at a 5.8 percent annualized rate over the last 10 years, compared with a fall of 1.1 percent per year in the price of communication.
Over the last two years, inflation in the Producer Price Index (PPI) for finished goods has run more than three percentage points faster than the CPI—5.9 percent compared with 2.7 percent. There are two reasons for this considerable difference.
First, the PPI is a goods index. By not measuring inflation in services, food and energy account for far more of the finished PPI than they do in the CPI and are therefore more sensitive to fluctuations in these prices. When non-core prices fell sharply in late 2008 and early 2009, the PPI fell at a 9.7 percent annualized rate over nine months compared to an annualized rate of decrease in the CPI of only 3.8 percent. The more recent rise in the PPI relative to the CPI is little more than the flip side of this difference.
Second, because the PPI measures only goods and not services, the low inflation in rents has helped keep down core consumer prices, but not producer prices. Over the last 24 months, the core PPI has risen only 3.1 percent (a 1.5 percent annualized rate.) The core CPI minus shelter has gone up 3.8 percent over the same period.
With core inflation remaining low and real hourly earnings flat or falling over the last six months, there is little general concern of rapid price increases. (The average real wage has fallen 1.6 percent in the last two years.) As energy prices return to their 2008 levels, some slowing of headline inflation may result.