July 14, 2005 (Prices Byte)
Energy Prices Hold Inflation Flat in June
July 14, 2005
By Dean Baker
The overall CPI was unchanged in June, after falling 0.1 percent in May. As was the case in May, a sharp drop in energy prices was a key factor. Energy prices fell 0.5 percent in June after falling 2.0 percent in May. The core (excluding food and energy) CPI rose by 0.1 percent in both months. The annual rate of inflation in the core index over the last three months has been just 1.2 percent, down from 2.0 percent over the last year. The annual rate in the overall CPI over the last three months has been 1.9 percent, compared to a 2.5 percent inflation rate over the last year.
These inflation rates are down sharply from their levels of the winter. There does appear to be a genuine weakening of inflationary pressures at earlier stages of production that had been pushing inflation higher. While the June producer price data have not yet been released, the data from May showed less evidence of inflation at almost every stage of production.
One of the main factors responsible for the slowing of inflation is less inflation in import prices. Non-oil import prices rose rapidly in 2004 and into the beginning of 2005. Inflation in non-oil import prices has slowed sharply this year, and the most recent data indicate that they may even be falling slightly. This is consistent with the recent upturn in the dollar against the euro and other major currencies.
Some of the recent slowing of inflation is due to anomalous factors, which will likely be reversed in future months. Apparel prices fell by 0.7 percent in June and have fallen at a 5.2 percent annual rate over the last three months. Clearly this rate of decline will not continue and will likely be in part reversed, especially if restrictions on imports from China are put in place. Recreation prices fell by 0.3 percent in June, driven by a 1.3 percent decline in the index for televisions and cable access. This decline is also unlikely to be repeated.
Housing prices continue to moderate, with rent proper rising by 0.3 percent and owners' equivalent rent rising by 0.2 percent. Over the last three months, rent proper has risen at a 3.2 percent annual rate, while owners' equivalent rent has risen at just a 2.3 percent rate. Part of this gap is likely attributable to fact that some utility price increases have shown up in the rent proper index. In principle, this index is supposed to reflect rental costs excluding utilities, but it is difficult to ensure that all rents have been stripped of the utility components.
Other prices also appear to have moderated substantially. The annual rate of increase in medical care costs has been just 3.3 percent over the last quarter, compared to 6.0 percent over the prior three months. The "other goods and services" index has increased at just a 1.7 percent annual rate over the last quarter compared to a 3.3 percent rate over the prior quarter.
There are reasons for believing that the slowdown in inflation may not persist. First, with the labor market showing some evidence of tightening, it is likely that there will soon be some upward pressure on wages, especially since real wages have been stagnant over the last year. (The June wage data almost certainly understated actual wage growth. It included such anomalies as a decline in nominal wages in the retail sector.) Second, productivity growth appears to have slowed sharply in the second quarter. The current projections for growth in output and hours imply that productivity growth will be close to zero. Whether this is a fluke of measurement or an actual slowdown remains to be seen, but if the latter is the case, it will mean that there will be considerable cost pressure in the future. Finally, the rise in the dollar is not likely to persist, with the trade deficit remaining near record levels.
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.