May 17, 2006 (Prices Byte)
Inflation Continued to Edge Higher in April
May 17, 2006
By Dean Baker
Both the overall and core (excluding food and energy) Consumer Price Index (CPI) showed somewhat higher inflation in April than had generally been expected, as inflation continued to show signs of gradual acceleration. The overall CPI rose by 0.6 percent in April, driven by a 3.9 percent jump in energy prices. It has now risen at a 4.1 percent annual rate over the last quarter, up from a 3.5 percent rate over the last year. The core CPI rose by 0.3 percent for the second straight month, bringing the inflation rate in the core over the last quarter to 3.2 percent, compared to just a 2.3 percent rate over the last year.
There were some anomalous factors in the April data, most obviously a 0.6 percent jump in apparel prices. This follows a 1.0 percent rise reported for March. Apparel prices are always erratic, and these increases were due primarily to the difficulties of seasonal adjustments. Apparel prices had been dropping at the rate of approximately 1.0 percent a year. Even if the recent decline in the dollar is bringing the period of falling prices to an end, apparel prices will likely be near flat for a period of time, rather than rising sharply as recent data have shown.
There was also an anomalous 0.3 percent rise in the recreation component, driven by large increases in cable and satellite television fees. This is not likely to be repeated. On the other side, the “other goods and services” component showed no change, as the prices of tobacco and personal care products actually fell. These price declines are also not likely to continue.
Rising rents continue to be an important factor pushing up core inflation. The rent proper component rose 0.3 percent in April, while owners’ equivalent rent rose 0.4 percent. These components have increased at 4.0 and 4.5 percent annual rates, respectively over the three months. This could indicate some tightening in rental markets as higher interest rates are making it more expensive to buy houses.
Medical care prices are also showing evidence of accelerating inflation. They rose 0.4 percent in April, bringing the annual rate of increase over the last three months to 5.2 percent, up from a 4.1 percent rate over the last year.
There continues to be evidence of inflationary pressures at earlier stages of production. The overall finished goods index rose by 0.9 percent in April, driven by a 4.0 percent jump in energy prices. The core finished goods index rose by just 0.1 percent for the second consecutive month, but this figure may be misleading. Passenger car prices, which account for more than 10 percent of the core consumer goods index, reportedly fell by 0.8 percent in April. Over the last year, this component of the finished goods index has fallen by 3.4 percent. By comparison, the new vehicle component of the CPI has fallen by just 0.3 percent over this period. This gap implies that either dealers’ margins are rising rapidly or that the Bureau of Labor Statistics is having difficulty accurately measuring the prices paid by dealers. Either way, the sharp decline in reported car prices at the wholesale level is not being reflected in car prices at the retail level.
The overall intermediate and crude goods indexes rose by 0.9 and 1.2 percent in April, respectively. The core indexes rose 0.4 and 4.7 percent for the month. The core intermediate goods index has risen at a 4.3 percent annual rate over the quarter, and the core crude goods index has risen at a 41.2 percent rate.
The April price data are consistent with a continuing pattern of gradually accelerating inflation. Higher energy and material prices are being passed on at later stages of production. With the labor market tightening, workers are better positioned to make up for some of the decline in real wages due to higher energy prices. Slower productivity growth may also be a factor. Even with the strong first quarter, productivity has grown at just a 1.5 percent annual rate over the last six months.
Dean Baker is a co-director of the Center for Economic and Policy Research in Washington, DC
CEPR’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.