ISSN 2330-717X

Sharp Drop In Energy Prices Keeps US CPI Flat In January; Modest Acceleration In Core Index – Analysis


The overall Consumer Price Index (CPI) was unchanged for the third consecutive month in January due to a 3.1 percent decline in energy prices. This brought the year-over-year rate to 1.6 percent. The core index rose by 0.2 percent for the fifth consecutive month, bringing the unadjusted year-over-year rate of inflation in the core to 2.2 percent.

While sharply falling energy prices have held down overall inflation over the last three months, there is some modest evidence of acceleration in the core index. The annualized rate of inflation in last three months (November, December, January) compared with prior three months (August, September, October) is 2.5 percent.

This shows up even more clearly if we look at the core excluding shelter. The year-over-year inflation in this index is 1.4 percent. The annualized rate comparing the last three months with the prior three months is 2.1 percent. Inflation in shelter costs, which has been the major factor driving core inflation, actually has been slowing slightly in recent months, with the annualized rate over the last three months compared with the prior three at 3.1 percent, down from 3.2 percent year-over-year.

The data may slightly understate the underlying increase in the core index since energy prices are directly embedded in some core components. For example, the rent proper index often includes utility costs that are paid by landlords. Lower energy prices will reduce the rate of rent increases for these units. Airfares, which account for roughly 0.8 percent of the core index, have fallen at a 9.2 percent annual rate for the last three months.

The main factors that seem to be driving the modest acceleration in the core index are the recreation component and medical services. The rate of inflation for the recreational component, which accounts for 7.2 percent of the core index, increased from 1.4 percent over the last year to a 3.4 percent annualized rate in the last three months.

For medical services, which accounts for 8.8 percent of the core index, the rate of inflation rose from 2.4 percent year-over-year to a 3.8 percent annualized rate over the last three months. Insurance seems a big part of this picture, with the health insurance component increasing at well over a 1.0 percent rate in each of the last three months. (The longer series is no longer available on the Bureau of Labor Statistics’ website.)

While these components do show a substantial increase in the inflation rate, it is important to remember that the data are erratic. The acceleration should be seen as a warning sign, but it is hardly conclusive evidence that inflation is moving upward.

In most other core components inflation remains well under control. The annualized rate of inflation in new vehicle prices over the last three months has been zero, the same as over the last year. Inflation in education has actually fallen slightly with an annualized rate over the last three months of 2.5 percent, compared to 2.7 percent over the last year. Apparel prices have risen at a 0.9 percent rate over the last three months compared to a 0.1 percent rate over the last year.

Auto insurance prices, which had been a major factor driving core inflation, have risen at just a 0.8 percent annual rate over the last three months. This is down from a 3.4 percent rate over the last year. In 2017 and 2018, the year-over-year rate had been in the high single digits.

Overall, this should be seen as a mostly positive report with inflation remaining well under control in most sectors. The sharp drop in energy prices means that workers are now seeing substantial real wage growth. Of course, this drop will not continue, so we should expect the overall CPI to move towards the 2.2 percent core inflation rate. There are some components that are sources of upward pressure on the core inflation rate, but it would be best to see several more months of data before being concerned that this is a continuing trend.

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Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

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