By Dean Baker
The overall Consumer Price Index (CPI) rose 0.1 percent in June, while the core index rose 0.3 percent. Flat food prices and another sharp drop in energy prices kept inflation in the overall index below the core rate. For the year, the overall CPI is up 1.6 percent, while the core index is up 2.1 percent.
The larger than expected rise in the core index was driven by large increases in several components which are most likely anomalies that will be reversed in future months. The most striking was a 1.1 percent rise in apparel prices in June. This component accounts for almost 4.0 percent of the core index. Apparel prices are highly erratic on a monthly basis; the index is down by 1.3 percent over the last year. It will be surprising if this increase is not reversed in future months.
Used vehicles also showed an unusual increase, with the index rising 1.6 percent in June, after falling 1.3 percent and 1.4 percent in April and May, respectively. This component accounts for 3.0 percent of the core CPI. Used vehicle prices are now up 1.2 percent over the last year. By comparison, new vehicle prices rose 0.1 percent in June and are up 0.6 percent over the last year. Here also, it seems unlikely that the June rise is part of a long-term trend, as opposed to a one-time jump.
There are some areas where inflation does appear to be a problem, most notably health care insurance. The index rose by 1.3 percent in June, bringing the increase over the last year to 13.7 percent. This insurance component of the CPI measures the administrative costs and profits of insurers, not premiums. These have been rising very rapidly for the last year and a half.
Rent also continues to be a serious problem area. While the story varies hugely across cities, with some actually seeing slower rates of rental inflation, the rent proper index rose by 0.4 percent in June, bringing its increase over the last year to 3.9 percent. The owners’ equivalent rent (OER) index rose by 0.3 percent in June and is up by 3.4 percent over the last year. It seems that there may be some modest increase in the rate of rental inflation, with the annualized rate of inflation in the OER in the second quarter compared with the first quarter coming in at 3.8 percent.
If we look at the core, excluding shelter, inflation is very much under control. This index increased by 0.3 percent in June but is up just 1.1 percent over the last year. The annualized rate of inflation from the first quarter to the second quarter was 0.2 percent.
In other areas, the index for food away from home rose 0.3 percent in June and is up 3.1 percent over the last year. This compares to a 1.9 percent year-over-year increase in the food index. The gap is likely attributable to the more rapid rise in pay for restaurant workers due to a tight labor market and an increase in state and local minimum wages.
The medical care index rose 0.3 percent in June and is up 2.0 percent for the last year. One item holding down medical inflation is prescription drug prices, with the index dropping 0.6 percent in June and 2.0 percent over the last year. It is important to remember that this index is only tracking the price of drugs already on the market, it does not pick up new drugs that may first appear at very high prices. This means that spending on drugs could still be rising rapidly even with this index showing falling prices. College tuition prices fell 0.1 percent in June, however, they are still up 3.4 percent over the last year.
On the whole, this report presents a picture where inflation remains well under control. Rent remains a substantial and growing problem, but this is driven by supply constraints not higher costs from a tighter labor market. The Fed certainly has no reason to fear excessive inflation in the near future.