May 15, 2009 (Prices Byte)
Core CPI Increases by 0.3 Percent in April
By Dean Baker
May 15, 2009
Tobacco prices add 0.1 percentage points to the core inflation rate in April.
The core CPI rose by 0.3 percent in April, bringing its annual rate of increase over the last quarter to 2.5 percent. This is up slightly from a 1.9 percent increase over the last year. The overall CPI was flat in April, as a 2.4 plunge in energy prices and a 0.2 percent drop in food prices offset the rise in the core index. The overall CPI has risen at a 0.9 percent annual rate over the last quarter, compared with a drop of 0.7 percent over the last year.
Some of the factors pushing the core inflation rate higher were clearly anomalies. For example, there was a 9.3 percent jump in tobacco prices that added almost 0.1 percentage points to core inflation for the month. This was attributable to higher taxes on cigarettes. While state and local governments will continue to impose additional taxes, it is unlikely that there will be such a large effect in future months.
There was also an anomalous 0.5 percent increase in hotel prices. Hotel prices had been falling sharply (they are down by 5.9 percent from last year), primarily because there is enormous excess capacity in the industry. The April rise was almost certainly a blip, possibly connected with Easter, which will be reversed in May.
However, there are sectors where modest inflation continues to be deeply embedded. Medical care costs rose by 0.4 percent in April. They have risen at a 3.7 percent rate over the last quarter, up slightly from the 3.0 percent rate over the last year. The weakness of the economy may actually lead to somewhat more price pressure in this sector as state and local governments cut back on payments to providers, leading them to make up these funds elsewhere. Education may have a similar story. Education costs rose by 0.3 percent in April and have risen at a 5.5 percent annual rate over the quarter.
New car prices also showed a surprising 0.4 percent increase, bringing their rate of increase over the quarter to 7.6 percent. Most likely, this rise is simply due to the end of special discounts as opposed to any upward trend in auto prices. Car prices had fallen sharply at the end of 2008 and are still down 0.2 percent from their year ago level.
The picture at earlier stages of productions is still unclear. The overall finished goods index increased by 0.3 percent in April, driven by a 1.5 percent rise in food prices. The core index rose by 0.1 percent. The core finished goods index has risen at a 1.2 percent rate over the last quarter, while the core finished consumer goods index has risen at a 2.9 percent rate.
However, at earlier stages of production, most prices are falling. The overall intermediate goods index fell 0.5 percent in April, while the core index fell 0.9 percent. This was the 7th consecutive decline in the core index. It has fallen at a 6.9 percent rate over the last quarter. The overall crude goods index rose 3.0 percent in April, driven by a 4.6 percent rise in food prices and a 2.9 increase in energy prices. The core index fell 0.6 percent. The April increase in the overall index follows months of sharp declines. The overall crude goods index is 40.0 percent below its year ago level.
The positive side of this price picture is that there seems to be little basis for concern about spiraling deflation. The sharp drop in the price of oil and other commodities has stopped and is being at least partially reversed. Also, there are sectors of the economy like medical care and education where cost pressures are likely to force prices up even in the face of weakening demand. However, the fact that the economy is continuing to sustain modest rates of inflation means that real wages are likely to fall as nominal wage growth slows or stops altogether. With the number of jobs and hours still falling sharply, the purchasing power of workers is declining at a rapid pace.
Dean Baker is Co-Director of the 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 email, contact CEPR at 202-293-5380 ext. 102 or email firstname.lastname@example.org.