Plunge In Energy Prices Sends US CPI Down By 0.1 Percent in March – Analysis

The rate of inflation in auto insurance slowed sharply in March to 0.3 percent.

A 2.8 percent drop in energy prices pushed the overall CPI down by 0.1 percent for the month, leaving it 2.4 percent above its year ago level. The core index increased 0.2 percent for the second consecutive month. It now stands 2.1 percent above its year-ago level, although taking the average of the last three months (January–March) compared with the prior three months (October–December), gives an annualized rate of 3.0 percent.

Housing continues to be, by far, the biggest factor adding any substantial price pressure in the index. The shelter component rose 0.4 percent and is now up 3.3 percent over the last year. The core index excluding shelter has risen just 1.2 percent over the last year.

There continues to be considerable variation across cities in the pace of rental inflation, with the West Coast cities being the bulk of the inflation story. Rental inflation is slowing in some formerly hot markets. For example, owners’ equivalent rent of primary residences has increased by 2.4 percent in New York over the last year and just 1.7 percent in Washington, DC. By contrast, it is up by 3.7 percent in San Francisco, 4.0 percent in Boston, 4.7 percent in Los Angeles, and 6.1 percent in Seattle.

There is rising dispersion in rental inflation rates as the cost of rental housing more rapidly increases in some cities.

Inflation in the other traditional problem areas remains well under control. Prescription drug prices fell 0.2 percent in March, the third consecutive decline. They are up just 1.9 percent over the last year. (It is important to remember that this just captures the price increases for drugs already on the market. It does not pick up the prices of new drugs coming on the market.) The price of medical care services rose 0.5 percent in March, but that is after being unchanged in February. Over the last year, medical care service prices have increased 2.1 percent.

College tuition prices fell 0.2 percent in March after being flat in February. They have increased by 1.7 percent over the last year. Even inflation in auto insurance has slowed, with prices rising just 0.3 percent for the month, although they are still up 8.9 percent over the last year. After rent, this component has been, by far, the biggest contributor to inflation over the last year.

There were some anomalous factors pushing inflation lower in March. Apparel prices fell 0.6 percent, but this followed rises of 1.7 percent in January and 1.5 percent in February. Over the year, apparel prices are up 0.3 percent. Tobacco prices fell 0.2 percent in March. This is not likely to be repeated in future months. Over the year, they are up 5.9 percent.

After rising through the fall, both new and used car prices seem to be on a downward track again. New vehicle prices were flat in March, but this after a 0.5 percent drop in February. They are down 1.2 percent over the last year. Used vehicle prices fell by 0.3 percent for the second consecutive month. They are up 0.4 percent over the last year.

Airline fares rose 0.6 percent for the second consecutive month. This is most likely a response to higher fuel prices. For the year they are still down by 5.7 percent.

On the whole, there is basically no evidence of any acceleration of inflation in the CPI, in spite of the relatively low unemployment rate. The only place where there is some evidence of inflationary pressure is in rents, and this is in a relatively limited number of markets. The inflation rate in pretty much every other sector seems to be stable or trending downward.

There is some modest evidence of inflation pressures at earlier stages of production. The overall index for final demand rose by 0.3 percent in March, while the core index increased by 0.4 percent. However, we have seen increases of this size in the past and they did not lead to an acceleration of inflation in the CPI, so there is little reason to see these increases as a basis for higher consumer inflation in the future. In short, inflation looks to be low and stable for the immediate future.