June 15, 2011 (Prices Byte)
By David Rosnick
Approaching previous peak prices, energy inflation falls in May
The Consumer Price Index rose 0.2 percent in May—the slowest rate since November—as energy prices fell for the first time since last June. The core rate of inflation ticked up to 0.3 percent and is now running at a 2.5 percent annualized rate over the last three months.
Energy prices had increased 26.4 percent since June of 2010 and 42.5 percent since the end of 2008. However, prices had fallen rapidly in the second half of 2008 and are now 8.3 percent below their July 2008 peak.
Shelter prices rose 0.2 percent in May—the largest single-month rise in the index since November of 2008. Inflation in rent and owners’ equivalent rent has remained very low over the period, as the bubble-driven oversupply of housing has continued to play out; the prices of owner’s equivalent rent have grown more slowly over the last three months (0.9 percent annualized) than the three months prior (1.3 percent.) Rather, the jump in shelter price inflation is attributable in large part to a 2.9 percent increase in the price of lodging away from home. Though it accounts for only 2.4 percent of the shelter index, lodging added about 0.07 percentage points to the rate of inflation.
Transportation inflation fell again in May. About one-third of the transportation index is tied to energy prices either directly (in motor fuels) or indirectly (in the prices of public transportation) so it is not surprising to see slowing price growth as energy prices slow and fall. The price of new and used vehicles rose 1.0 percent in the month, but, as discussed in last month's report, there are issues with the timing of new models and inflation has been a modest 3.1 percent over the last year.
The price of medical care grew relatively slowly last month. Though hospital services have jumped 0.6 percent and at a 6.4 percent annualized rate since February, the price of medical care overall grew only 0.2 percent. The price of medical care commodities was unchanged in May after growing 2.2 percent since December. It is not uncommon in recent years to see bursts of inflation in this category followed by periods of low or negative price changes.
Elsewhere in core prices, education rose 0.4 percent in May, and prices have now risen at a 4.2 percent annualized rate over the last three months. Communication prices fell 0.2 percent last month and 1.4 percent annualized over the last three months.
Core finished producer prices have run only slightly faster than core consumer prices—3.0 percent annualized over the last three months. Though core intermediate prices have grown considerably faster in recent months—12 percent annualized since February—they stand only 2.4 percent above their peak of September 2008.
As crude producer prices fell 4.1 percent in May and have now fallen at a 3.0 percent annualized rate over the last three months, it is far from clear that the price pressures will remain. However, the price of crude materials is still 16.9 percent below its 2008 peak.
Nonagricultural export prices rose 0.5 percent in May and have now risen 7.0 percent over the past 12 months. While fuel accounts for about 7.6 percent of this index, driving up prices over this period, the dollar has also fallen 8.8 percent in the last year. Consequently, the price seen by purchasers of U.S. exports in local currency has fallen by 2.4 relative to May 2010. This lower price should help boost sales of U.S. goods abroad even as the dollar price of each unit climbs.
Similarly, nonfuel import prices rose 0.4 percent in May and have now risen 4.4 percent over the last year. From the perspective of the foreign seller, then, prices have fallen 4.8 percent since last May. Thus, exporters to the U.S. may have to raise prices—making their goods less attractive to American consumers—in order to remain profitable.
Overall, this report is consistent with several areas of discussion in recent months. The rebound in energy prices abruptly reversed itself; though we should not expect a sustained fall, it seems that energy inflation is abating. In addition, the effect of the fall in the dollar on trade prices has resulted in conditions favorable to a reduction in the trade deficit. Though the immediate mechanism is slightly higher inflation, the possibility of increased exports and domestic substitution of foreign goods bring welcome opportunities for the U.S. economy.