August 16, 2006 (Prices Byte)
Falling Apparel Prices Lower Core Inflation in July
August 16, 2006
By Dean Baker
The overall CPI increased by 0.4 percent in July, driven largely by a 2.9 percent jump in energy prices. However, inflation in the core (excluding food and energy) CPI eased slightly, rising by 0.2 percent in July, after rising by 0.3 percent in each of the prior four months. The slowing of core inflation is explained almost entirely by a 1.2 percent decline in apparel prices. Had apparel prices remained flat in July, as they had in June, core inflation for the month would have been rounded to 0.3 percent. Over the last quarter, inflation has risen at a 4.5 percent annual rate, up from a 4.1 percent rate over the last year. The core inflation rate has been 3.2 percent over the last quarter, up from 2.7 percent over the last year.
At this point, the core CPI is showing a mix of accelerating and decelerating prices. The July decline in apparel prices is an anomaly. Seasonal adjustments are always difficult with apparel, and monthly price movements are highly erratic. It is unlikely that a sharp decline will be repeated in future months.
But apparel was not the only component showing easing price pressure. The other goods and services component declined by 0.2 percent and medical care costs rose by just 0.2 percent. The decline in other goods and services prices is almost certainly an anomaly, but medical care inflation appears to be slowing. Over the last quarter, medical care prices have risen at a 3.2 percent annual rate, down from 4.0 percent over the last year.
On the other side, the rental components, which together account for almost 40 percent of the core CPI, continue to be a major source of inflationary pressure. The rental indexes both rose by 0.4 percent in July. The rent proper and owners’ equivalent rent indexes have risen at 4.6 percent and 5.5 percent annual rates over the last quarter, respectively. This rate of increase is likely to slow in the near future as unsold homes are placed on the rental market.
In addition to rent, recreation prices also appear to be rising more rapidly. They have risen at a 2.2 percent annual rate. They had risen at less than a 1.0 percent annual rate in 2003 and 2004. There are no clear trends at this point in either the education and communication or other goods and services components. New car prices rose by 0.1 percent in July after falling for the prior three months, as some special incentives expired.
There continues to be substantial evidence of inflation at earlier stages of production. The core finished goods index fell by 0.3 percent in July, but this was driven largely by anomalous declines reported for new car, mobile home, and newspaper prices. These declines will not be repeated. The overall finished goods index rose by 0.1 percent.
The core intermediate goods index rose by 0.5 percent in July, while the core index increased by 0.7 percent. Over the last three months, these indexes have risen at a 9.7 percent and 10.8 percent annual rate, respectively. Crude goods prices rose 3.1 percent, with core crude goods rising 1.3 percent. Over the last quarter, core crude goods have risen at a 43.3 percent annual rate.
Taken together, the price reports for July present a mixed picture. There are some signs that inflation is easing off, most notably in medical care. One of the current sources of inflationary pressure, rising rental costs, is unlikely to be sustained as the inventory of unsold homes forces more property onto the rental market. However, nominal wages are rising considerably more rapidly than they had in 2005, and it is likely that workers will try to gain wage increases to offset the recent jump in energy prices, as long as the labor market remains reasonably tight. With non-oil import prices rising at a modest pace (after declining in 2002-2004) and productivity growth slowing to a 2.0-2.5 percent range, it seems likely that inflation will stay near its current level, or creep somewhat higher, unless the economy slides into recession.
Dean Baker is a co-director of the Center for Economic and Policy Research in Washington, DCCEPR’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.