By Dean Baker
The overall Consumer Price Index (CPI) rose 0.2 percent in December, bringing the increase over the last year to 2.3 percent. The core CPI increased by 0.1 percent, but also ended the year up 2.3 percent. There is modest evidence of acceleration in the overall CPI, although not in the core index. The annualized rate of inflation, comparing the last three months (October, November, December) with the prior three months (July, August, September), was 2.6 percent. For the core index, the annualized inflation rate over this period was 2.1 percent.
The main factors driving core inflation continue to be shelter and medical care. Shelter costs rose 0.2 percent in December and are up 3.2 percent over the last year. The core index, excluding shelter, rose 0.1 percent in December and was up 1.5 percent over the last year. There is some evidence that shelter costs are slowing modestly.
The owners’ equivalent rent index, which excludes utility costs that can be counted in the rent proper index, rose 0.2 percent and is up 3.3 for the last year. However, the annualized rate for this index, comparing the last three months with the prior three months, is just 2.7 percent. The slowing of shelter inflation has been offset by the increase in the inflation rate for medical care. The annualized rate for the core CPI excluding shelter, comparing the last three months with the prior three months, was 2.0 percent.
The medical care index rose 0.6 percent in December and is up 4.6 percent over the last year. While medical care costs had been reasonably well contained for most of the last decade, in recent months they have begun to rise sharply. The biggest sources of inflation in December were prescription drugs, the price of which jumped 2.1 percent, and health care insurance, which rose by another 1.4 percent. Prescription drug prices are now up 3.0 percent over the last year, while health insurance costs have risen by 20.4 percent.
Health insurance costs began to explode in September of 2018 and have now risen by more than 1.0 percent for 16 consecutive months. The index has risen 26.6 percent over this period. It is important to remember that this index only measures the profits and administrative costs of insurers, not premiums paid by households.
There seems little evidence of any acceleration of inflation elsewhere in the CPI. New vehicle prices rose 0.1 percent in December after dropping the prior two months. They are up just 0.1 percent for the last year. Used vehicle prices fell 0.8 percent in December and are down 0.7 percent over the last year. Apparel prices rose 0.4 percent for the month but are still down 1.2 percent over the last year.
Prices for food at home rose 0.1 percent last month and are up 0.7 percent over the last year. The index for food away from home rose 0.3 percent in December and is up 3.1 percent over the last year. The difference is explained largely by higher wages for workers in the sector due to rising state and local minimum wages and a tight labor market.
The index for energy commodities rose 2.8 percent in December and is up 7.4 percent over the last year. This is explained largely by the recent run-up in world oil prices, which crossed $60 a barrel in December after being near $50 at the start of 2019. In spite of the jump in oil prices, airfares actually fell by -1.6 percent in December. They are up 1.7 percent over the last year.
There is little in this report to indicate any underlying problems with inflation. It appears that rental inflation is slowing; although there are major differences by city. Health care is replacing shelter as the major source of rising prices, with the cost of health insurance leading the way. Otherwise, inflation seems well under control pretty much everywhere, in spite of the 3.5 percent unemployment rate.