By Dean Baker
The overall Consumer Price Index (CPI) fell 0.4 percent in March, driven by sharp falls in prices in several sectors that were strongly affected by the coronavirus crisis. The most important of these was a drop in gasoline prices of 10.5 percent. This is the result of the price of a barrel of oil falling to well under $30 on world markets. If it stays near current levels we are likely to see further declines in April.
Other areas showing sharp price declines due to the crisis are hotels and airlines, the indexes for which fell by 7.7 percent and 12.6 percent, respectively. Apparel prices also showed a steep 2.0 percent drop. This is due to both weak world demand and a rise in the value of the dollar that has made imported apparel cheaper. New vehicle prices also fell in March, declining by 0.4 percent for the month.
Not all prices fell in March. The price of food purchased in stores rose by 0.5 percent in March, after rising by the same amount in February. It is not clear how much of this increase might be due to the impact of the crisis. Food prices are always erratic, and even with two consecutive sharp increases, food prices are up just 1.1 percent over the last year. On the other hand, the Bureau of Labor Statistics noted that they stopped in-store price collections in the middle of the month, so the March data may not pick up crisis-driven price increases later in the month.
It is worth noting that restaurant prices rose only 0.2 percent in March, the same as February. Restaurant prices had been substantially outpacing food prices. They have risen 3.0 percent over the last year, presumably due to higher pay for restaurant workers. With the plunge in people going to restaurants as a result of the crisis, this pattern seems to have been reversed.
The medical care services index rose 0.5 percent in March and is now up 5.5 percent over the last year. Most categories of medical services had substantial price rises in the month, but health insurance continues to be the biggest driver of inflation in this category. The insurance index (which only measures profits and administrative costs, not premiums) jumped 1.3 percent in March and is now up by 20.6 percent over the last year.
Interestingly, prescription drug prices fell 0.2 percent in March and are up just 1.5 percent over the last year. Again, this index just measures price changes for existing drugs, it does not pick up the impact of new more expensive drugs.
The indexes for rent proper and owners’ equivalent rent both rose 0.3 percent in March. Over the last year, they are up by 3.7 percent and 3.2 percent, respectively. The crisis would not have affected contracted rents in this month, but it is likely that many landlords are making arrangements that allow tenants to at least delay rent payments, if not actually get rent reductions. The impact of such arrangements will likely not be picked up in the CPI.
It will be important to look at the price data closely as the crisis continues in order to find evidence of shortages in specific sectors. It is not clear how well the CPI will be able to track shortage-induced price rises if price collectors are unable to do their usual in-store price checks due to health concerns. However, this is still likely to be the best data we have.
It is also important to note an oddity in the data as a result of the crisis. The sharp price declines are overwhelmingly in areas where consumption has fallen back sharply. The price of gasoline fell by more than 10 percent, but people under stay-at-home orders are not driving much. Similarly, few people are taking advantage of the sharp declines in airfares and hotel prices.
The CPI is a fixed-weight index, which means that the weight that these items have in the index is not affected by the amount consumers actually spend on them in the current month. Usually, a fixed-weight index will show a slightly higher inflation rate than an index with weights adjusted for changes in consumption patterns. In this case, the opposite is true. At least for the duration of the crisis, we will care far more about trends in food prices and rent, than the bargains in hotels and airfares.