High US Headline Inflation Rate Driven Mostly By Rising Energy Prices – Analysis

By Nick Buffie

The January Consumer Price Index (CPI) showed an inflation rate of 0.6 percent for the month, bringing the inflation rate in the overall index to 2.5 percent for the last year. The core index (excluding food and energy) rose 0.3 percent in January, bringing its rate of increase over the last year to 2.3 percent.

The 0.6 percent rise in January (actually 0.5506 percent if we want to be precise) was driven by a 4.0 percent jump in energy prices. However, even in the overall index, there is little evidence of acceleration in recent months. Excluding shelter costs, which rose 3.5 percent between January 2016 and January 2017, core inflation would’ve been only 1.3 percent.

The jump in energy prices appears to have worked its way into airline prices, which went up 2.0 percent during the month. However, this increase may prove temporary: airline fares are still 1.3 percent cheaper than they were in October and 3.3 percent cheaper than they were at this time last year.

The prices of new cars and trucks are up 0.9 percent over the past year thanks largely to a 0.8 percent increase last month. The costs of car and truck rentals went up quite a bit more (3.2 percent for the year), while the costs of used cars and trucks fell 3.7 percent. The prices for leased cars and trucks also fell 3.0 percent over the last 12 months.

Prescription drug prices are up 6.1 percent over the past year, while nonprescription drug prices are up just 0.1 percent. This news comes on the heels of an announcement that drug makers will be increasing the price of Emflaza from $1,200 to $89,000 after being granted “orphan drug” status by the U.S. Food and Drug Administration.

Another area of price increases came from services performed by high-end professional workers. Legal services have increased 6.6 percent in price over the last year, while the price of financial services rose 4.4 percent. Costs for checking accounts and other bank services went up 5.3 percent.

IT is one area with noticeably falling prices. Information technology commodities are down 5.0 percent in price relative to January 2016. Prices for personal computers and peripheral equipment are down 4.3 percent, while prices for computer software and accessories are down 7.8 percent.

The other price indices — the Producer Price Index and the Export-Import Price Indexes — showed relatively low rates of inflation. As with the CPI, what little inflation there was could be attributed predominantly to energy prices.

In the Producer Price Index (PPI), inflation was estimated at 1.6 percent over the past year. Interestingly, in a break from recent years, the prices for goods rose more than the prices for services (3.1 percent vs. 0.8 percent). Energy prices, which rose a full 14 percent, were responsible for much of the overall increase — excluding energy, prices were up just 1.0 percent over the last 12 months. Core inflation was just 1.2 percent.

The price indexes for both imports and exports showed similar results. Between January 2016 and January 2017, import prices rose 3.7 percent, partially reversing a 6.5 percent decrease from the previous 12 months. This was entirely due to the cost of fuel imports, which rose 57.6 percent in price; by contrast, there was no reported change in the price of nonfuel imports. The prices of exports went up 2.3 percent, also partially reversing the previous year’s decrease of 5.9 percent. Excluding foods and fuels, there was no measured change in export prices.

These data indicate that, despite the high headline inflation over the past month, the general trend in prices is far steadier. Moreover, much of the short-term increase in prices can be attributed directly to rising energy costs, which are infamously volatile. Correcting for these factors, we see that inflation is relatively low and shows no clear upward trend.

The December price report showed a modest increase in the overall rate of inflation, however the core remained unchanged from its rate over the last year. Between December 2015 and December 2016, the overall CPI rose 2.1 percent. This compares to a 1.7 percent year-over-year increase in November. The core inflation rate over this period was 2.2 percent, which is essentially the same as it has been over the past few months.

The rise in the overall CPI is entirely due to a jump in energy prices in recent months. Energy prices rose 1.5 percent in December, the fourth consecutive month in which they have increased by more than a full percentage point. This follows declines in 2015 and earlier in 2016. The energy index is up by 5.4 percent over the last year.

Core inflation from December 2015 to December 2016 was 2.2 percent; this is no different from the 2.2 percent inflation rate we get when comparing the last three months of 2015 to the last three months of 2016. Given no reported movement in the rate of price growth, the underlying forces determining economy-wide inflation don’t appear to have changed recently.

In terms of the 2.2 percent core inflation rate, the main factor keeping inflation even that high is housing. Between the last three months of 2015 and the last three months of 2016, shelter costs rose 3.6 percent. If we exclude the increase in shelter prices, core inflation would’ve been just 1.1 percent during that time.

In other categories, prescription drug costs are up 6.2 percent of the past year, while the prices for nonprescription drugs are down 0.6 percent. The former is more important to family budgets with a weight in the CPI of 1.4 percent, while nonprescription drugs have a weight of less than 0.4 percent.

For Americans considering traveling, airline flights are becoming cheaper, while car and truck rentals are becoming more expensive. Prices for the former fell 4.7 percent over the past year, while prices for the latter rose 10.5 percent.

Finally, college students will likely welcome the fact that college tuition and fees rose just 2.3 percent, almost in line with economy-wide inflation. On the other hand, prices for college textbooks rose 6.1 percent, which stands in stark contrast to the 3.3 percent decline in the prices of recreational books. Parents of young children have some reason to celebrate as well, given large reported declines in the prices of toys (down 8.7 percent), infants’ and toddlers’ apparel (down 2.5 percent), and infants’ equipment (down 7.1 percent).

The Producer Price Index (PPI) showed a year-over-year price increase of 1.6 percent, which is somewhat higher than what was reported in previous months. Notably, the PPI’s overall inflation rate was the same as its core rate, indicating that the upward trend in overall inflation isn’t just being driven by food and energy prices.

One industry that reversed years of falling prices was mining. After three straight years of falling prices, mining companies reported a 4.7 percent jump in prices in 2016. The price increase was widespread within the sector: coal mining companies raised their prices 1.6 percent; mineral mining and quarrying companies raised their prices 1.4 percent; and metal ore mining companies raised their prices a whopping 16.3 percent. The latter increase seem to have worked its way into the prices of manufactured goods as well: manufacturers of primary metals raised their prices 6.6 percent in 2016 after cutting them 15.1 percent in 2015. Inflation in these sectors can be erratic at times, so it isn’t clear if this past year was an anomaly or a harbinger of future price increases.

The Export-Import Price Indexes showed modest inflation that was driven predominantly by rising fuel and food prices. Overall, export prices rose 1.1 percent over the past year, while prices for “core” exports fell 0.1 percent. Import prices went up 1.8 percent during the same time, but fell 0.4 percent for items other than foods and fuels.

Taken as a whole, recent data seem to indicate that inflation is stabilizing or slowly creeping upward if higher energy costs are passed through to other sectors. However, the overall data don’t give much reason to fear that the Fed will overshoot its inflation target anytime soon.

*Nick Buffie is a Research Associate at the Center for Economic and Policy Research (CEPR) in Washington, D.C.

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