By Nick Buffie*
The US Bureau of Labor Statistics released its newest report on the Consumer Price Index for All Urban Consumers (CPI-U), the primary measure of consumer inflation. Overall prices rose 0.2 percent in the past month, equivalent to an annual increase of about 2.4 percent.
Prices over the past three months (April, May, and June) are just 1.1 percent higher than from the same three months of 2015. However, “core” inflation — which excludes volatile food and energy prices and therefore tends to be a better predictor of future inflation — is up by 2.2 percent using the same measure. The difference is driven predominantly by a large decrease in energy prices, which have fallen 9.4 percent over the past year. (Food prices are up 0.3 percent.)
This 2.2 percent core inflation rate is basically in line with the Fed’s 2 percent target, though it should be noted that the 2.2 percent rate is driven predominantly by rising shelter costs, which can also be somewhat volatile. Shelter costs are up 3.5 percent relative to June of last year, while the costs of housing at school (consisting largely of college students’ housing) are up 3.1 percent. Excluding food, energy, and shelter, prices are up just 1.4 percent relative to June of last year.
It is also telling that inflation is running above 1.0 percent in just one region of the country. Comparing the most recent three months to the same three months from 2015, prices are up 0.8 percent in the South and Midwest and just 0.9 percent in the Northeast. The overall inflation rate is only pulled up to 1.1 percent thanks to higher inflation in the West, where prices have risen 1.6 percent over the past year. A number of major cities are bordering on deflation, most notably Philadelphia, where prices have risen just 0.1 percent over the past year. Inflation is running at just 0.3 percent in Cleveland and Chicago.
This underscores the fact that low inflation can be just as problematic as deflation — the difference between a 0.3 and a 0.1 percent inflation rate is no different than the difference between a 0.1 and a -0.1 percent inflation rate. The national inflation rate consists of prices averaged across cities and states, so a low inflation rate implies that at least some parts of the country will be experiencing deflation. The fact that inflation is running at less than 1 percent in three out of the four major regions of the country should be worrisome.
In terms of the prices of specific goods and services, the aforementioned 0.3 percent increase in food prices is driven mostly by higher fruit and vegetable prices. Prices for those goods are up 1.3 percent relative to last June, with apples experiencing the most notable rise (9.6 percent). Prices for meat, poultry, fish, and eggs are down 5.0 percent, while prices for dairy and related products are down 2.2 percent. Coffee lovers may be happy to know that coffee prices are also down 2.2 percent.
The decline in energy prices came across the board, though the largest decrease came from fuel oil, for which prices fell 19.6 percent over the last 12 months. Gas prices have fallen 15.4 percent, while utility gas services are down 5.0 percent and electricity costs are down 1.8 percent.
There have also been real changes in apparel costs, though prices have moved differently for men and women. Costs for men’s apparel are down 1.0 percent, while costs for women’s apparel are up 1.7 percent. Parents may be glad to see that infants’ and toddlers’ apparel have dropped 5.3 percent in price. Watches are 6.1 percent more expensive than they were a year ago, while jewelry prices are up 7.0 percent.
The index for goods and services produced by the transportation sector showed a marked decline of 3.7 percent over the last 12 months. The prices of new cars and trucks fell 0.5 percent, while the prices of used ones fell 3.1 percent. Public transportation costs fell 2.3 percent thanks largely to declining air fares, where prices are down 4.7 percent from last year. Intracity transportation costs are up 1.6 percent.
Unsurprisingly, two areas with notable prices increases were education and medical care. The costs of educational goods and services rose 3.0 percent over the past year. College textbooks rose 6.9 percent in price, and even rose 1.4 percent over just the past month (note that this is greater than the overall annual inflation rate). College tuition and fees are up 3.0 percent, and even elementary and high school costs are up 3.4 percent.
Medical care costs have risen 3.6 percent since last June. Medical care commodities (goods) are up 3.2 percent in price, thanks largely to a 4.4 percent increase in the prices of prescription drugs. The costs of nonprescription drugs, by contrast, fell 0.5 percent. Medical care service costs rose 3.8 percent, with the most notable increase in costs coming from inpatient hospital services, where prices rose 5.1 percent. Health insurance costs rose a notably high 7.1 percent.
Core inflation is gradually moving closer to the Fed’s target, though it remains abnormally low by historical standards. And perhaps most disturbingly, inflation is running below 1.0 percent in the vast majority of the country, indicating that low inflation poses a more serious risk to the economy than high inflation.
*Nick Buffie is a Research Associate at the Center for Economic and Policy Research (CEPR) in Washington, DC.