January 19, 2005 (Prices Byte)
Falling Energy Prices Lowers CPI in December
January 19, 2005
By Dean Baker
The overall CPI fell by 0.1 percent in December driven by a 1.8 percent plunge in energy prices, along with a 0.1 percent drop in food prices. The core (excluding food and energy) CPI rose by 0.2 percent for the third straight month. The annual rate of inflation in overall CPI has been 3.0 percent over the last quarter, down slightly from the 3.3 percent rate over the last year. The rate in the core has been 2.0 percent over the last quarter, compared with 2.2 percent over the last year.
The 3.3 percent overall rate of inflation is the highest since a 3.4 percent rate in 2000. It is 0.6 percentage points above the 2.7 percent rate of wage growth over the last year. The core inflation for 2004 was 2.2 percent, up from 1.1 percent in 2003 and the highest since a 2.7 percent rate in 2001.
In recent months, slowing rental inflation has been an important factor holding down the core index. The rental components, which account for 37.6 percent of the core index, have risen at just a 1.8 percent annual rate over the last quarter. Even this increase probably overstates the true rise in rental prices. The rent component should in principle exclude the cost of utilities, but utility prices still tend to move the index to some extent. The pure rent index has increased at a rate that is 0.8 percentage points higher than the owners' equivalent rent index over the last six months, presumably reflecting in part the sharp rise in gas and electricity prices over this period.
There were few notable anomalies in the December data. Apparel prices fell by 0.4 percent, after being largely flat for the year. This drop probably reflects heavy discounting by many retailers to sustain holiday sales. Medical care prices increased by just 0.3 percent in December, bringing the annual rate over the quarter to just 3.8 percent, down from 4.2 percent over the last year. Medical care prices had been increasing at close to a 6.0 percent rate at the beginning of the year.
Inflation also moderated slightly at earlier stages of production. The finished goods index fell by 0.7 percent in December, driven by a 4.0 percent drop in energy prices, following sharp increases in the previous two months. The core finished goods index rose just 0.1 percent, the smallest increase since a 0.2 percent decline in July. Even with the December numbers, the core index rose at a 2.6 percent annual rate in the last quarter and 2.2 percent over the last year. It had been falling as recently as 2002.
The intermediate goods index also showed some moderation, with the overall index falling 0.3 percent and the core index rising 0.5 percent. The core index has risen at a 4.6 percent annual rate over the last quarter and an 8.3 percent rate over the last year.
It is worth noting a slowdown in the rate of inflation in construction materials. The price of these goods has risen at just a 1.2 percent annual rate over the last quarter compared to 10.0 percent over the last year. While these price movements are erratic, if this slowdown is real, it would be consistent with other data showing some weakening in the construction sector.
While inflation clearly does not pose any serious problem at the moment, it does appear to be on an upward path. Thus far, the main force pushing inflation higher has been higher material and import prices, as wage growth has not even kept pace with inflation. This does raise the prospect of a further increase in the inflation rate, when the labor market tightens enough to allow real wages to begin increasing again. It is also worth noting that the latest data indicate some slowing in productivity growth, with the third quarter rate reported as 1.8 percent, and 4th quarter rate likely to be close to 1.5 percent if projections of 3.5 percent GDP growth prove correct.
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.