June 15, 2005 (Prices Byte)
Inflationary Pressures Ease in May
June 15, 2005
By Dean Baker
All the price indices gave evidence that inflation is easing in May, showing either declines or very low increases. The overall CPI fell by 0.1 percent in May, driven by a 2.0 percent drop in energy prices. The core (excluding food and energy) CPI rose by just 0.1 percent after being flat in April. The annual rate of inflation in the core index over the last three months is 2.2 percent, the same as its rate over the last year. The annual rate in the overall CPI over this period is 4.4 percent, compared to a 2.8 percent inflation rate over the last year.
Some of the anomalous factors that held down inflation in April reappeared in May. At the top of this list is a 2.4 percent decline in hotel prices in May, following a 1.2 percent drop in April. The decline in hotel prices along was sufficient to reduce the core inflation rate by 0.1 percentage points. Hotel prices are always erratic. While it is difficult to know the underlying trend, clearly they are not falling at a double-digit annual rate. The price decline in this component will be at least partially reversed in the months ahead.
Similarly, apparel showed no change in prices following a 0.6 percent decline in April. Given the pressure to restrict low cost Chinese imports, it is virtually certain that there will be some modest upward movement in apparel prices in the months ahead. Inflation in the education and communication sector was flat in May, after rising 1.9 percent over the last year.
The more impressive evidence of moderating inflation actually occurred in the producer price indices. These indices showed easing of inflationary pressures at every stage of production. The overall finished goods index fell by 0.6 percent in May, driven by a 3.5 percent drop in energy prices. More importantly, the core finished goods rose by just 0.1 percent. It has now risen at just a 1.6 percent annual rate over the last three months. By contrast, it had been rising at a 4.0 percent annual rate over the second half of 2004.
The intermediate goods index shows a similar picture. The core intermediate goods index fell by 0.3 percent in May, its first decline in almost two years. It has risen at just a 0.8 percent annual rate over the last three months. This index had risen by 8.3 percent in 2004. The slowdown is reflected in all the components of the intermediate goods index. Even the construction index showed a drop of 0.2 percent in May. The crude goods index also declined in May, with the overall indexing falling by 2.0 percent, while the core index fell by 3.6 percent.
The easing of inflationary pressures appears to stem largely from a reversal in the factors that had been pushing up prices, most importantly the recent reversal in the dollar. The declining dollar had caused non-oil import prices to rise at close to a 3.0 percent annual rate in 2003 and 2004. This has slowed sharply in recent months, with non-oil import prices rising at just a 1.6 percent annual rate in the last quarter.
Any evidence of accelerating wage growth seems also to have been eliminated with average hourly wages rising at just a 2.6 percent annual rate over the last quarter, the same as their rate of increase over the last year. While this is good news from the standpoint of containing inflation, it means that wages are not keeping pace with price increases, most importantly those resulting from higher energy costs. Falling real wages will limit demand if the pattern persists.
While inflation appears to be slowing at the moment, core consumer inflation is still probably somewhat higher than recent numbers suggest. With the reversal of anomalous prices declines, the core rate of inflation is still in the 2.5 -3.0 percent range. Also, the dollar must fall to reduce the trade deficit, and real wages will presumably rise at some point, so inflation is likely to reappear again in the not so distant future.
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.