By Dean Baker
The annualized rate of inflation in the non-shelter core has been just 1.1 percent in the last three months compared with the prior three months.
The May Consumer Price Index (CPI) was very much in line with expectations, as both the core and overall index rose 0.2 percent in the month. Over the last year the core index has risen 2.2 percent, while the overall CPI has risen 2.8 percent. Inflation in the core continues to be driven largely by higher shelter costs. A core index that excludes shelter rose just 0.1 percent in May. It is up 1.3 percent over the last year. Comparing the last three months (March, April, and May) with the prior three months, the annualized rate in this index has been just 1.1 percent.
The shelter component of the index rose 0.3 percent in May, driven in part by a huge 2.9 percent jump in the lodging away from home (primarily hotels and motels) category. This figure is highly erratic. It has risen 4.4 percent over the last year.
The shelter component has risen 3.5 percent over the last year, driven by a 3.6 percent increase in the rent proper index and a 3.4 percent increase in the owners’ equivalent rent (OER) index. The rent proper index includes utilities in many units. As a result, when energy prices rise rapidly, the rent proper index would be expected to increase at a faster rate than the OER index. For the month of May, the rent proper index increased by 0.3 percent, while OER rose 0.2 percent.
There is little evidence of inflationary pressures elsewhere in the index. New vehicle prices rose 0.3 percent in May, but this follows four months in which they were flat or falling. They are now down by 1.1 percent over the last year. Prices for used cars and trucks fell by 0.9 percent in May and are down by 1.7 percent over the year. Apparel prices were flat in May and have risen by 1.4 percent over the last year.
Tuition costs rose 0.2 percent in May and are up 1.9 percent over the last year; however college textbook prices rose 3.3 percent in May and are up 3.8 percent over the last year. Airline prices have been plummeting, in spite of higher fuel costs and the recent consolidation in the industry. They dropped 1.9 percent in May and are down 6.6 percent over the last year.
Medical care prices remain relatively well-contained. While earlier in the century the price of medical care services often increased at more than a 5.0 percent annual rate, inflation in this component has not differed much from the overall CPI in recent years. The cost of medical care services fell by 0.1 percent in May and is up 2.3 percent over the last year.
Inflation in prescription drugs has been more erratic, but also has been reasonably well-contained lately; although a 1.4 percent jump in May brought the increase in this component to 3.7 percent over the last year. It is important to remember that this index measures price changes for drugs that are already on the market. It would not capture additional costs that might be associated with an expensive new drug being substituted for a cheaper older drug.
Inflation in medical care services has slowed sharply in the last two decades.
There are still some areas where inflation is evident. The price of tobacco products rose 0.4 percent in May and is up 3.3 percent over the last year. The price of auto insurance, which accounts for more than 3.0 percent of the core CPI, rose 0.4 percent in May and is up 8.3 percent over the last year.
The price of household operations, which includes items such as domestic services and gardening, rose 0.6 percent in May and 5.8 percent over the last year. The cost of legal services rose 0.2 percent in May and is up 4.8 over the last year. The cost of financial services rose 0.1 percent in May, but is still up 6.6 percent over the last year.
Apart from these narrow categories, inflation seems well-contained. There is certainly is no case that the inflation rate is accelerating. If shelter is pulled out of the core, the inflation rate remains far below the Fed’s 2.0 percent target.