February 22, 2006 (Prices Byte)
Higher Energy Prices Drive Inflation in January
February 22, 2006
By Dean Baker
The consumer price index rose by 0.7 percent in January, after declining the prior two months, driven by a 5.0 percent jump in energy prices. The core CPI (excluding food and energy) rose by 0.2 percent in January, bringing the annual rate of increase over the last quarter to 2.4 percent. This is a slight acceleration from the 2.1 percent rate over the last year. The overall CPI has fallen at an annual rate of 0.2 percent over the last quarter, but it is up 4.0 percent over the last year.
There were few noteworthy anomalies in the January data. The new vehicle index rose by 0.6 percent, but this followed declines of 0.1 percent in the prior two months making the annual inflation rate over the last quarter for this component 1.5 percent. Apparel prices rose by 0.3 percent in January, following a decline of the same amount in December. The annual rate of inflation in apparel over the last quarter is 0.7 percent. Owner’s equivalent rent rose by 0.2 percent, while rent proper rose by 0.1 percent in January, bringing the annual inflation rate in these components over the last quarter to 2.8 percent and 2.4 percent, respectively.
Probably the biggest anomaly in the January CPI data was the modest 0.1 percent rise in medical care costs. This was held down by a 0.3 percent decline in the index for professional medical services. This is first decline in this component since February of 2002, and the largest in its 26-year history. It is likely that this decline will be reversed next month and that the medical care index, which has risen at a 3.5 percent annual rate over the quarter, will show a sharper jump in February.
While core inflation appears to be increasing very gradually in the CPI, there is more evidence of inflationary pressures at earlier stages of production. The overall finished goods index rose by 0.3 percent in January, while the core index rose by 0.4 percent. The price rises driving this increase seem to broadly based. The core finished goods index has risen at a 2.6 percent annual rate over the last quarter compared to just a 1.5 percent increase over the last year. The core finished consumer goods index rose at a 3.2 percent annual rate over the last quarter, up by 1.7 percentage points from its 1.5 percent inflation rate over the last year.
The core intermediate goods index rose by 1.0 percent in January, bringing its annual rate of increase over the last quarter to 7.9 percent, up from a 4.8 percent rate of increase over the last year. The core crude goods index fell by 0.1 percent in January, but it still showed a 17.7 percent annual rate of inflation over the last quarter, compared to 6.0 percent over the last year. Clearly, there is evidence that inflation is accelerating at earlier stages of production.
It is likely that more of this inflation from earlier stages in the production process will be showing up in the CPI in the near future. The labor market has tightened enough so that workers are in a position to start making real wage gains that will offset the losses of the past two and a half years. Nominal wage are now growing a close to 3.5 percent annual rate, compared to a 2.5 percent rate in the first half of 2005. This rate of growth could edge higher if the labor market continues to tighten in the months ahead.
There is also some evidence that productivity growth may have slackened. Productivity was reported as falling by 0.6 percent in the 4th quarter. This figure is undoubtedly an anomaly, but averaging the last two quarters gives a productivity growth rate of just under 2.0 percent. This compares to productivity growth of 3.7 percent in the year from 2002-2004. While it was reasonable to expect that this extraordinary growth would not be sustained, slower productivity growth still implies more inflationary pressure.
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.