October 14, 2005 (Prices Byte)
Energy Costs Push Inflation to 25 Year High
October 14, 2005
By Dean Baker
A 12.0 percent jump in energy prices in September caused the CPI to rise by 1.2 percent in the month, the largest monthly increase since a 1.4 percent rise in March of 1980. The sharp rise in September followed increases of 0.5 percent in each of the prior two months, bringing the annual inflation rate for the quarter to 9.4 percent.
Inflation in the core (excluding food and energy) CPI is still relatively tame, rising by just 0.1 percent for the fifth consecutive month. The annual rate in the core index over the last three months is just 1.4 percent, down from a 2.0 percent annual rate over the last year. However, the low inflation rate shown by the core is somewhat deceptive. Shelter costs, which account for 41.6 percent of the core index, actually fell by 0.2 percent in September and have risen at just a 0.3 percent annual rate over the last quarter. Pulling out shelter, inflation in the core CPI would have been running at a 2.2 percent annual rate over the last quarter.
The main factor holding down shelter costs is the overbuilding associated with the housing bubble. This has led to record nationwide rental vacancy rates, which is putting downward pressure on rental prices in many of the areas with the biggest bubbles in housing prices. For example, rents in the New York City area rose by just 1.9 percent over the last year. They rose by 1.8 percent in Tampa, Florida and by just 0.3 percent in both Boston and San Francisco. (This is the inflation rate for the owners’ equivalent rent index, which strips out utility prices.) The erratic hotel component has also held down core inflation, falling at an 11.2 percent annual rate over the last quarter.
There is little evidence that higher energy prices have yet had much impact on the other components of the CPI, although there is evidence that higher prices in non-energy items are showing up at earlier stages of production. While September producer price data will not be released until next week, data on import and export prices indicate that non-energy goods are rising in price. The price of non-oil imports rose by 1.2 percent in September while the price of non-agricultural exports rose by 1.1 percent. The monthly data for these categories is always erratic, but such sharp increases would seem to indicate that inflation is showing up outside of the energy sector.
In addition to shelter there are some other anomalous factors that have held down inflation in recent months. Apparel prices have declined at an extraordinary 2.6 percent annual rate over the last six months. This will likely be partially reversed, especially if restrictions are placed on imports from China. New car prices fell at a 4.6 percent annual rate over the last quarter, a decline that reflects the extraordinary discounting from the summer. This decline is also likely to be at least partially reversed in the months ahead.
One area that does appear to be showing lower inflation is medical care, with prices having risen at just a 2.8 percent annual rate in the last three months. Medical care costs had been rising at more than a 4.0 percent annual rate in 2004. If this slower price growth persists it is certainly unexpected good news.
The overall inflation picture in this report is not encouraging. While the sharp run-up in energy prices is likely to be at least partially reversed in future months, it is likely that consumers and producers will be facing higher energy prices for the foreseeable future. Most immediately, this will drain purchasing power from consumers, who are only seeing nominal wages grow at a 3.0 percent annual rate, far less than the current rate of inflation. Higher energy prices will also be passed on in other areas leading to higher inflation in the core indexes. These increases will be compounded if lower productivity growth and higher future wage growth add to costs.
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.