PREVIEW: What to Look for in the January Consumer Price Index

02/09/2021 12:00am

(The monthly Consumer Price Index (CPI) is scheduled for release by the Bureau of Labor Statistics on Wednesday, February 10th at 8:30 AM Eastern Time.)

There has been a sharp slowing of inflation in the main problem sectors of education, medical costs, and rent. In the last four decades, education and medical cost inflation has hugely outpaced the overall CPI. In addition, inflation in rent had been running more than a full percentage point higher than the overall CPI since 2014.

Inflation in Education
In recent months, these sectors have actually been seeing unusually low inflation. The education index has been flat for the last six months. This undoubtedly reflects many schools giving tuition breaks due to online classes substituting for in-person instruction. While many schools remain online, it will be interesting to see if the index starts to rise more rapidly as schools return to in-person instruction. There is clearly a quality issue that is being missed in the index, but it’s still worth seeing what happens with prices.

Inflation in Medical Care Costs
Medical care costs have also slowed sharply in the last six months, actually falling at a 0.6 percent annual rate over the last six months. Medical costs already had slowed sharply in the last decade, although the medical care index still had outpaced the overall CPI by roughly a percentage point. It is important to note that this index measures the prices of the same goods and services through time. That means that if spending rises due to the development of new drugs or procedures, it is not picked up in the index.  (Overall spending growth also slowed sharply in 2010, which is not widely known for some reason.)

The medical care cost decline over the last six months has occurred pretty much across components, but it is most striking for the health insurance index, which has been dropping at a rate of more than 1.0 percent a month, after rising at this pace for much of 2018 and 2019. This index only measures the administrative costs and profit of insurers, not premiums. If health care costs remain under control as the pandemic wanes, and people get neglected care, then it will help to dampen inflation.

Inflation in Rent
The rent components — rent proper and owners’ equivalent rent (OER) — account for more than 30 percent of the core CPI. The pandemic has led to a sharp slowing of rental inflation. This seems to be a story where many people are leaving the higher priced cities and moving to lower cost parts of the metro area or leaving the metro area altogether for lower cost parts of the country. To date at least, the slower rental inflation in the high-priced areas has not been offset by more rapid inflation in the lower priced areas. Over the last six months, the OER index has risen at just a 1.6 percent annual rate. (The OER is a cleaner measure of rental inflation since it excludes the cost of utilities that are included with rent.)

It is less likely that inflation will be a major concern overall if inflation remains low in these problem areas as the economy recovers from the pandemic. The economy was still hugely feeling the impact of the pandemic in January, but if the vaccine rollout proceeds rapidly, the economy may be getting closer to normal in the next two or three months.

CEPR produces same-day analyses of government data on inflation, employment, GDP and other topics. 
Follow @DeanBaker13 on Twitter to get his quick-take analysis of government data immediately upon release.

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