The overall CPI rose by 0.4 percent in August, driven by a
4.6 percent jump in energy prices. The core CPI increased by just 0.1 percent for the second
consecutive month. The overall CPI
has risen at a 4.9 percent annual rate for the last quarter, compared to a drop
of 1.5 percent over the last year. The core CPI has risen at a 1.6 percent annual rate over the
quarter, almost identical to its 1.4 percent rate of increase over the last
year.
There were few notable anomalies in the data. The price of new vehicles was reported
as falling 1.3 percent, which presumably reflects the timing of sales. This knocked close to 0.1 percentage
point off the core rate of inflation for the month. Hotel prices reportedly rose 0.5 percent in August after
falling 7.8 percent over the last year.
Even with this jump in hotel prices, shelter costs rose just
0.1 percent. The record housing
vacancy rate, together with a glut of hotel rooms, is keeping shelter costs
from rising. In fact, the
inflation rate in the shelter component over the last quarter has been zero. This has been a big factor in depressing
the core inflation rate. Apart
from shelter, the core rate of inflation rose at a 2.2 percent annual rate over
the last quarter.
The inflation in the core comes largely from the usual
sources. Health care costs rose
0.3 percent in August and have risen at a 2.7 percent rate over the last
quarter. Education costs rose 0.5
percent for the month and have risen at a 5.8 percent annual rate over the
quarter. Tobacco costs rose just
0.1 percent in August, but have risen at a 13.2 percent rate over the quarter,
driven by higher taxes. This
increase added almost 0.2 percentage points to the core inflation rate over the
quarter.
There are some signs in the August producer price indexes
and import/export price index that inflation could be edging upward in future
months. The overall finished goods
index in the PPI rose by 1.7 percent in August, driven by sharply higher food
and energy prices. However, even
the core index rose by 0.2 percent. The overall finished goods index has risen at a 10.4 percent
annual rate in the quarter, while the core index has risen at a 2.4 percent
rate.
The overall intermediate goods index rose 1.8 percent, while
the core index increased 0.6 percent. The overall crude goods index rose 3.8 percent, with the core
crude goods index rising by 6.0 percent. On the import side, non-fuel import prices rose 0.6 percent. Most of the increase was in raw material
prices, but prices of many manufactured goods are also rising.
For the most part, these recent price increases are just
reversing price declines that took place late last year or early this year. The finished goods index is still 12.3
percent below its year ago level, while the core index is 2.3 percent higher. The core intermediate goods index is
down 8.2 percent, while the core crude goods index is down 30.0 percent from
year ago levels.
However, the path going forward is likely to be one in which
rising commodity prices and import prices do put some upward pressure on the
overall inflation rate, with at least some of the price pressure showing up in
the core indexes. This will have
two important implications for the recovery. First the higher inflation, even if still modest, may lead to
growing fears in financial markets that could send interest rates higher. Ironically, the source of inflation has
nothing to do with expansionary fiscal and monetary policy, but any uptick in
inflation may increase political pressure to tighten policy.
The other problem is simply that higher inflation will erode
wages, leaving workers with less money to spend. In the context of an economy that is likely to be losing jobs
at least into the first months of 2010, the prospect of declining real wages
does not augur well for consumption growth.
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 16 September 2009 under a Creative Commons license.