December 15, 2006 (Prices Byte)
Falling Car and Airfare Prices Leave Core Inflation Unchanged
December 15, 2006
By Dean Baker
Car prices shaved 0.6pp off the core inflation rate in the last three months.
the overall and core (excluding food and energy) consumer price indices
were unchanged in November. The consensus forecast was that both
indices would show a 0.2 percent increase. The overall CPI has now
fallen at a 3.9 percent annual rate in the last three months, compared
to an increase of 2.0 percent over the last year. The core CPI has
risen at a 1.6 percent annual rate over the last three months, down
from a 2.6 percent rate over the last year.
There were several anomalies that were important in depressing the core
inflation rate for November. At the top of this list was a 0.8 percent
decline in car prices. This undoubtedly reflects the large discounts
that the domestic manufacturers are offering to reduce their
inventories. Vehicle prices have declined at a 5.7 percent annual rate
over the last quarter. This drop is likely to be partially reversed in
the months ahead. (New and used vehicles account for 10.2 percent of
the core index.
Airfares fell by 4.8 percent in November, reflecting the drop in fuel
prices. Airfares have fallen at a 27.1 percent annual rate since July.
Wal-Mart’s $4 prescription drug policy seems also to be having an
effect on the CPI. The index for drugs fell by 0.7 percent in November.
There was also an extraordinary drop of 4.2 percent in the information
technology component, which presumably reflects extraordinary Christmas
discounts. This component has declined at a 30.8 percent annual rate
over the quarter, compared to a 13.0 percent decline over the last year.
Both tobacco and personal care products posted unusual price declines
in November, with each component falling by 0.3 percent. Both have a
weight of approximately 1.0 percent in the core CPI.
The only obvious anomaly on the high side was a 1.0 percent rise in
hotel prices. These have risen at a 4.8 percent annual rate over the
last quarter, only slightly higher than their 4.4 percent rate over the
last year. Rental inflation continues to slow, reflecting the impact of
record nationwide vacancy rates. Owners’ equivalent rent (OER) rose by
0.3 percent in November, bringing its annual rate of increase for the
last three months to 4.1 percent. This is down from an annual rate of
increase of 5.6 percent in the three months ending in May. The index
for rent proper, which is one-fourth the weight of OER in the CPI, rose
by 0.4 percent. It has risen at a 4.9 percent annual rate over the last
quarter. This higher increase partly reflects the cost of utilities,
which are not included in OER.
The producer price index will not be released until next week, but the
data on import and export prices suggest that inflationary pressures
are continuing to weaken at earlier stages of production. Non-fuel
import prices rose by 0.1 percent in November, after falling by 0.1
percent in October. However, they are still 2.8 percent higher than
year ago levels. Non-fuel import prices fell in 2002-2003.
Non-agricultural export prices rose by 0.1 percent in November, after
falling energy prices pushed the index down by 0.4 and 0.5 percent in
September and October, respectively. This index is up 3.4 percent over
the last year.
The inflation data for November appear to indicate that the
inflationary pressures from the spring and summer have largely
dissipated. The slower growth in rental inflation is especially
striking, since the two rental components together account for almost
40 percent of the core CPI. However, several of the price declines that
have held down inflation in November, as well as the prior two months,
are clearly anomalies that will not be repeated and may be partially
reversed in the months ahead. The drop in car prices tops this list,
but the recent decline in air fares and drug prices will also not
persist. Core inflation is still likely to be near 2.5 percent in
future months, when these one-time events are no longer holding down
the inflation rate.
Dean Baker is Co-director of Center for Economic and Policy Research in Washington, D.C.
Prices Byte is published each
month upon release of the Bureau of Labor Statistics’ reports on the consumer
price and the producer price indexes.