October 17, 2006 (Prices Byte)
Inflation Moderates at All Levels in September
October 17, 2006
By Dean Baker
The overall CPI fell by 0.5 percent in September, as
a result of a 7.2 percent drop in energy prices. The core (excluding
food and energy) CPI rose by 0.2 percent for the third consecutive
month. The September rise puts the annual inflation rate in the core at
2.7 percent over the last three months, almost identical to the 2.9
percent rate over the last year. As a result of the sharp September
drop in energy prices, the annual inflation rate in the overall CPI has
been just 0.8 percent over the last quarter, compared to 2.1 percent
over the last year.
Signs of moderating inflation were widespread
throughout the index. Medical care prices rose by 0.3 percent in
September and have risen at just a 3.7 percent annual rate over the
last quarter. This compares to a 4.2 percent rate over the last year.
New vehicles prices fell by 0.1 percent for the second consecutive
month and have fallen at a 0.4 percent annual rate over the last
quarter. Even education prices are moderating, rising by just 0.2
percent in September. Education prices have gone up by 6.0 percent over
the last year.
Rents, which had been a key factor pushing inflation
higher earlier in the year, also appear to be moderating. Owners’
equivalent rent (OER) rose by 0.3 percent for the second consecutive
month, bringing its annual rate of increase over the last quarter to
3.9 percent. This is down from a 5.6 percent rate of increase in prior
three months. This slowdown is extremely important for the core
inflation rate, because the OER component accounts for more than 30
percent of the core index. The slowdown is likely attributable to the
fact that many homeowners have been unable to sell houses from which
they have moved, and are now being forced to put them up for rent
rather than let them sit vacant indefinitely.
The index for rent proper rose by 0.4 percent for
the fifth consecutive month. This index has risen at a 4.5 percent
annual rate over the last quarter. This index has less than one-fourth
the importance in the CPI of the OER component. The movement of the
rent proper index is likely to differ somewhat because it also includes
utilities. It is likely that the somewhat higher rate of inflation
currently in the rent proper index reflects the fact that landlords are
passing on utility price increases that they saw earlier in the year.
Most of the producer price indexes also showed
evidence of slower inflation. The overall finished goods index fell by
1.3 percent in September. The core index rose by 0.6 percent in
September, but this was driven primarily by a 2.8 percent jump in car
prices that was largely reversing sharp prices declines in the prior
two months. Over the last quarter, core finished goods prices have
fallen at a 0.3 percent annual rate and core consumer goods have fallen
at a 1.0 percent rate.
The overall intermediate goods index
fell by 1.4 percent, while the core index rose by just 0.1 percent.
Over the last quarter the core intermediate goods index has risen at a
5.0 percent annual rate. This is considerably slower than the 9.0
percent annual rate for the prior quarter.
The year over year increase in the CPI for the third
quarter provides the basis for the annual cost of living adjustment for
Social Security benefits. It is important to recognize that this
adjustment is based on the CPI-W, which is designed to track the
consumption patterns of wage and clerical workers, rather than the
broader CPI-U. While the CPI-W typically shows a 0.1 percentage point
lower inflation rate, this year over year gap as of September is an
extraordinary 0.4 percentage points, with the CPI-W showing a 1.7
percent rate of inflation, compared to the 2.1 percent rate in the
This report suggests that inflation is clearly
moderating. This will allow for some real wage growth, but with
productivity growth having slowed, there may be some serious pressure
on profit margins in the near future.
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.