Prices Byte

Slowing Rental Inflation Dampens August CPI

September 15, 2006

By Dean Baker 

The overall consumer price index (CPI) rose by 0.2 percent in August, in line with most forecasts. The core (excluding food and energy) CPI also rose by 0.2 percent in August, following an increase of the same size in July. The overall CPI has risen at a 3.6 percent annual rate in the last three months, almost the same as its 3.8 percent rate over the last year. The core CPI has risen at a 3.0 percent annual rate over the last three months, up slightly from its 2.8 percent rate over the last year.

The core inflation rate appears to be reasonably stable at the moment. The education component continues to be an important source of inflation, rising 0.7 percent in August. It has risen at a 7.4 percent annual rate over the last quarter. Medical care costs rose 0.4 percent in August after rising by just 0.2 percent in July. They have risen at a 3.5 percent annual rate over the quarter.

Housing costs may be moderating slightly. While rent proper rose by 0.4 percent for the third consecutive month, the owners’ equivalent rent component, which has more than four times the weight in the CPI, rose by just 0.3 percent. The annual rate of inflation in the owner’s equivalent rent component has been 4.5 percent over the last three months. This is down from a 5.6 percent rate of increase over the prior three months.

It is likely that rental inflation will slow further in the months ahead. There is a record vacancy rate for units being sold as owner-occupied housing. Since few people can afford to let a property sit vacant for long periods of time, it is likely that many of these vacant units will be put up for rent in the near future. This will increase the supply of rental housing and put downward pressure on rents.

It is worth noting that the CPI-W, which is weighted slightly differently to correspond to the consumption patterns of more moderate-income families, has shown a somewhat higher inflation rate recently. The CPI-W rose by 0.4 percent in August and has risen at a 4.1 percent annual rate over the last quarter. While this largely reflects the greater weight assigned to energy in the CPI-W, even the core CPI-W showed somewhat more rapid inflation, rising 0.3 percent in August. (The fact that small differences in weighting can cause the core CPI-W to show a 0.3 percent increase, suggest that the actual increase for August in the standard CPI was very close to 0.25 percent.) The core CPI-W has risen at a 3.1 percent annual rate over the last three months.
 
The producer price index will not be released until next week, but the data on import and export prices continue to suggest some increase in inflationary pressures at earlier stages of production. Non-fuel import prices rose by 0.2 percent in August and have risen at a 3.2 percent annual rate over the last quarter. Non-agricultural export prices rose 0.4 percent in August and have risen at a 5.3 percent annual rate over the last three months. (The increase originally reported for July was revised up by 0.1 percentage points in both categories.) 

The recent rate of inflation in both categories is a substantial acceleration. Non-fuel import prices rose by just 1.0 percent in 2005 and non-agricultural export prices were actually falling in 2004. The import prices are a cost that, in part, could be passed on in final prices. Exports are a large sample of the goods and services produced in the United States. Patterns in export prices tend to follow patterns in prices for the larger economy.

The inflation data for August present a mixed picture. The glut of vacant ownership units, which are likely to be put up for rent in the months ahead, should dampen rental inflation. At the same time, some components like medical care and education continue to show substantial inflation. With cost pressure also coming from earlier stages of production, inflation is likely to remain near its current level for 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.