February 23, 2005 (Prices Byte)
Consumer Inflation Remains Contained in January
February 23, 2005
By Dean Baker
The overall consumer price index rose by just 0.1 percent in January, after being flat in December. The core CPI (excluding food and energy) rose by 0.2 percent in January, the same increase shown for the prior three months. The annual rate of inflation in the overall CPI for the last three months has been just 1.3 percent, compared to a 3.0 percent rise over the last year. The inflation rate in the core index over the last quarter has been 2.0 percent, down slightly from a 2.3 percent rate over the last year.
The modest inflation in the consumer price index stands in sharp contrast to the inflation showing up at earlier stages of production. The overall finished goods index rose by 0.3 percent in January, while the core index rose by 0.8 percent. While sharp movements in energy prices have dominated the overall price indexes over the last two years, there clearly is acceleration in the inflation rate in the core producer goods indexes. The core finished goods index has increased at a 4.8 percent annual rate over the last quarter, while the core finished consumer goods index has increased at a 5.5 percent rate. While anomalous jumps in prices for alcoholic beverages (2.8 percent in January), cars (1.2 percent), and tobacco (3.1 percent) were the cause of the extraordinary January rise, price increases were broadly based.
There is a similar picture at the intermediate goods level. The overall intermediate goods index rose by 0.4 percent in January, while the core index rose by 0.8 percent. The core intermediate goods index has increased at an 8.8 percent annual rate over the last quarter, up slightly from its 8.5 percent rate over the last year. By comparison, in 2002 both the overall and core finished goods and intermediate goods indexes fell.
The main reason for the difference between the 0.2 percent January inflation rate in the core CPI and the 0.1 percent overall rate was a 1.1 percent decline in energy prices. Sharp declines in energy prices in December and January partially offset the sharp increases of the prior two months. With oil prices again on the rise, it is unlikely that this decline will continue.
Some of the factors holding down the core inflation rate in January were a 0.7 percent plunge in hotel prices and a 0.8 percent decline in public transportation prices, driven by falling airfares. The decline in airfares is driven by intense competition in the industry, and is likely to stick for the immediate future, while the fall in hotel prices is almost certainly an anomaly that will be reversed. Tuition and fees also rose an unusually low 0.3 percent; they had risen by 6.5 percent over the last year.
On the other side, tobacco prices jumped 1.9 percent in January, presumably due to new taxes put in place at the beginning of the year. New car prices rose 0.4 percent in January, but this seems to reflect price increases at early stages of production.
Price increases in most other areas were pretty much in line with prior month's movements. Medical care prices rose by 0.4 percent, up slightly from 0.3 percent increases of the prior two months. Apparel prices rose 0.3 percent, following a 0.4 percent decline in December. Both rental indexes rose 0.3 percent in January, equaling the December rise in the rent proper component, and up from a 0.2 percent December increase in the owners' equivalent rent component. Over the last quarter, these two components combined have risen at a 2.2 percent annual rate.
The biggest news in the January price data has to be the further evidence of accelerating inflation at the wholesale level. The CPI data indicate that these price increases are not yet being passed along to any great extent, but it seems only a matter of time before higher inflation shows up at the retail level as well. With productivity slowing and a lower dollar pushing up import prices, higher inflation seems a virtual certainty.
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.
CEPR’s Prices Byte is published each month upon release of the Bureau of Labor Statistics' reports on the consumer price and producer price indexes.