US Inflation Continues To Run Below Target – Analysis

By Nick Buffie*

The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 0.3 percent in September, bringing the increase over the last year in the overall index to 1.5 percent, with the core rising 2.2 percent.

Prices over the past three months (July, August, and September) are just 1.1 percent higher than from the same three months of 2015. Excluding food and energy costs, prices are up 2.2 percent, which is just a smidge below the Fed’s 2.0 percent target, after adjusting for differences in the CPI and the core personal consumption expenditure inflator targeted by the Fed. A core index that includes food, as argued for in a recent paperby the St. Louis Fed, shows the core index running at just 1.9 percent over the last year, roughly 0.4 percentage points below the Fed’s target.

Overall, food prices showed a slight decline in costs (0.3 percent deflation) over the past year. If we look at the prices of specific food items, there is large variation by type of food. As one point of comparison, apples are up 4.3 percent in price over the past year, while oranges are up just 2.1 percent. Egg prices fell 37.6 percent. However, the most important discrepancy comes from the costs of eating out versus eating in: the price of food away from home rose 2.4 percent over the past year, while the price of food cooked at home declined 2.2 percent. A similar disparity arises when we look at the price of alcohol: alcoholic beverages consumed away from home are up 2.0 percent in price, compared with just a 1.0 percent increase for alcohol at home.

Energy prices have fallen 2.9 percent over the last 12 months. There have been notably large declines in the prices of fuel oil (down 8.5 percent) and gasoline (down 6.5 percent). Jet fuel fell 8.1 percent in price. These declining costs are likely behind the 2.7 percent drop in airline fares over the past year.

Two items that showed notable year-over-year price increases were car insurance and tobacco. Motor vehicle insurance costs rose 6.4 percent over the past 12 months, while the prices of tobacco and smoking products rose 3.5 percent. (Much of this rise is likely attributable to higher taxes.) The price of hospital services also rose 6.0 percent over the last year.

The Producer Price Index (PPI) showed a moderate 0.7 increase in prices for final-demand goods and services over the past year. Consistent with the data from the CPI, tobacco manufacturers reported a 5.2 increase in tobacco prices for the past year. This matches reported rates of cost growth from previous years. (Tobacco prices have risen 65.4 percent over the past 10 years, which is equivalent to a 5.2 percent annual rate of increase.) On the other hand, coal mining companies reported a 3.8 percent drop in prices, which is consistent with the story of declining demand for coal as an energy source. In fact, since September 2012, prices charged by coal mining companies have fallen 11.9 percent.

The Export-Import price indices both showed declining costs. Import prices fell 1.1 percent between September 2015 and September 2016, while export prices fell 1.5 percent. Non-fuel import prices were flat in September and are down 0.7 percent over the last year. Non-agricultural export prices were up 0.4 percent in September, after falling 0.6 percent in August. They are down by 1.4 percent over the last year.

On the whole, the price indices show little evidence of accelerating inflation. Whatever modest acceleration appears in the core index is due to higher shelter costs. A core index that excludes shelter has risen by just 1.3 percent over the last year.

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