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Jump in Energy Prices Leads to 0.6 Percent March Rise in CPI

Prices Byte by Dean Baker

For Immediate Release: April 17, 2007

Contact: Lynn Erskine, 202-293-5380 x115

With productivity growth slowing, inflation is likely to creep higher.  

A 5.9 percent jump in energy prices pushed prices up 0.6 percent in March. The increase brought the annual rate of inflation in the CPI over the last quarter to 4.7 percent, almost a full percentage point above the pace of wage growth. The core (excluding food and energy) index rose by just 0.1 percent in March, held down by declines in hotel and apparel prices. The core index has risen at a 2.3 percent annual rate over the quarter.

The non-core components are likely to be a source of inflationary pressure for the immediate future. Even if energy prices stabilize, food prices are likely to continue to rise more rapidly than the overall rate of inflation. Food prices increased by just 0.3 percent in March, but rose at a 7.3 percent annual rate over the last quarter. However, the producer price indexes suggest that there are further increases in food prices in the pipeline. The food component of the finished goods index rose at an 18.7 percent annual rate in the quarter. Over the same period, the foods and feeds component of the intermediate goods index rose at a 27.5 percent annual rate, and the crude goods component rose at an incredible 59.3 percent annual rate.

Food prices are extremely erratic, but there appears to be real upward pressure on prices, based in part on the conversion of large amounts of farmland to producing corn for ethanol. This not only raises corn prices, but also the price of competing crops and also feed and beef prices. The net effect is likely to be permanently higher food prices.

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