The overall consumer price index fell by 1.0 percent in October, driven by an 8.6 percent drop in energy prices. The core CPI also fell in October, declining 0.1 percent primarily as a result of a 1.0 percent drop in apparel prices. Over the last quarter, the CPI has fallen at a 4.4 percent annual rate. This compares with a 3.7 percent increase over the last year. The core CPI has risen at a 1.1 percent annual rate over the last quarter, compared with a 2.2 percent increase over the last year.
In addition to the sharp drop in apparel prices, the public transportation index fell by 3.3 percent, driven by a 4.8 percent decline in airfares. New car prices fell 0.5 percent, while used car prices fell 2.4 percent. Over the last quarter new car prices have fallen at a 6.9 percent annual rate while used car prices have plummeted at a 16.8 percent annual rate. A major factor in this decline is the rising default rate on car loans which is glutting the used car market. Lower prices for used cars will in turn depress new car sales, both because new cars must compete with low-priced used cars and because lower used car prices will mean that potential car buyers will get less money from trade-ins.
The rent proper index rose by 0.4 percent, while owners’ equivalent rent (OER) rose by just 0.1 percent. The OER component has risen at a 2.0 percent annual rate over the last quarter, while the rent proper index has risen at a 3.8 percent rate. The difference is mostly attributable to the fact that the rent proper index includes utilities. Hotel prices fell by 1.7 percent in October and have fallen at a 6.9 percent annual rate over the quarter. This index is always erratic, but it is likely that it is now falling as a result of substantial excess capacity in the sector.
Prices in other sectors appear to be well-contained. Medical care costs rose by just 0.2 percent and have risen at just a 2.9 percent rate over the last quarter. Recreation prices rose at just a 0.1 percent rate, while the other goods and services component rose by 0.3 percent. The only major component that continues to show a high rate of increase is education, which rose 0.4 percent in October and has risen at a 6.0 percent rate over the last quarter.
Prices appear to be collapsing at earlier phases of production. The overall finished goods index fell by 2.8 percent in October, primarily as a result of a 12.8 percent drop in energy prices, although food prices also fell, declining 0.2 percent. The core finished goods index rose by 0.4 percent for the second consecutive month.
This increase appears to be driven by a few anomalies. For example, the price of tires reportedly jumped 4.1 percent in October, the price of jewelry rose 2.6 percent, and mobile home prices rose by 1.2 percent. These increases are unlikely to be repeated and in fact will likely be reversed. As a result, the core index will be flat or declining in the months ahead. Over the last quarter, the core finished goods index rose at a 4.4 percent annual rate, while the core consumer goods index increased at a 4.1 percent rate.
Prices are falling across the board at earlier phases of production. The core intermediate goods indeed fell 1.7 percent in October and the core crude goods index fell 17.0 percent. Over the last quarter, the core intermediate goods index has declined at 1.7 percent annual rate. The core crude goods index has fallen at an incredible 71.3 percent annual rate over the last three months.
The price data for this month shows that the inflationary pressures have been quickly eliminated and that prices are now declining in most areas of the economy. These price declines will be accentuated in future months by a sharp decline in import prices due to the run-up of the dollar. However, if commodity prices rise and the dollar falls when the immediate financial crisis is over, then this situation can be quickly reversed again.
Dean Baker is co-director of 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. For more information or to subscribe by fax or email contact CEPR at 202-293-5380 ext. 102, or warner [at] cepr [dot] net. This article was published by CEPR today under the title “CPI Falls 1.0 Percent in October.”