June Price Data Sends Mixed Signals on Inflation

The jump in prices, combined with flat nominal wages, means real wages are falling.

The overall CPI rose by 0.7 percent in June, driven by a 7.4 percent jump in energy prices.  It has now risen at a 3.3 percent annual rate over the last quarter, compared with a decline of 1.4 percent over the last year.  The core CPI rose by 0.2 percent in June, bringing its annual rate of increase over the last quarter to 2.4 percent.  This is up slightly from a 1.7 percent increase over the last year.

The somewhat higher-than-expected increase in the core inflation rate was driven by several anomalous price rises.  Prices of new cars rose by 0.7 percent, while prices of used cars rose by 0.9 percent.  These rises will not continue and could be reversed in the months ahead given the glutted car market.  The same is true of the 0.7 price rise reported for apparel.  While apparel prices may no longer be declining, they are not going to rise rapidly in the years ahead.

Medical care prices rose by just 0.2 percent in June, after rising 0.3 percent and 0.4 percent in the prior two months.  The rate of increase in medical care prices over the last quarter has been 3.6 percent.  This rate is likely to persist in the months ahead.  Education costs rose by 0.4 percent in June, slightly lower than the 5.8 percent annual rate over the last quarter.  Cutbacks in government support will put upward pressure on tuition as well as medical care costs for the immediate future.

The June data, while providing some evidence of increased inflation at earlier stages of productions, is still unclear.  The overall finished goods index increased by 1.8 percent in April, driven by a 6.6 percent rise in energy prices and a 1.1 percent rise in food prices.  However, even the core index increased by 0.5 percent in June.

The increase in the core finished goods index should most likely be viewed as an anomaly.  It has risen at a 2.1 percent annual rate over the last quarter.  This is certainly well above zero, but it is essentially the same as the 1.9 percent rate over the prior three months and well below the 4.7 percent rate in the second half of 2008.  Furthermore, an anomalous 2.0 percent jump in passenger car prices explains most of the increase in the core index.

There is a similarly confusing picture in the other producer price indexes.  The overall intermediate goods index rose by 1.9 percent in June, driven by an 8.9 percent increase in energy prices and 1.3 percent rise in food prices.  The core index rose by 0.4 percent.  However, the longer picture for the core index has been trending sharply downward.  It has fallen at an annual rate of 3.0 percent over the last quarter and at a 4.8 percent rate over the last 6 months.

The overall crude goods index rose 4.6 percent in June, driven by a 10.9 percent rise in energy prices.  However, even the core index rose by 2.6 percent.  Crude goods have been rising sharply across the board in recent months.  The overall crude goods index has risen at a 55.2 percent annual rate over the last three months, while the core index has risen at a 44.3 percent rate.  This follows sharp declines last year.  The overall crude goods index is still 40.0 percent below its year ago level, while the core index is 41.3 percent below its year ago level.

A careful assessment of recent price data indicates that there is little basis for concern about inflation.  However, it is clear that deflation is also not currently a problem.  Erratic price movements, especially in the energy sector, are not helpful in laying a basis for recovery, as they do undermine efforts at long-term planning.

The gas-driven jump in the CPI is bad news for the economy.  With nominal wages virtually flat and hours shrinking sharply, workers’ purchasing power is now falling at a rapid pace.  With stimulus spending now flowing at near its maximum pace, the economy desperately needs an additional boost.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C.  This article was first published by CEPR on 15 July 2009 under a Creative Commons license.