Prices Go Up…Not at All

Inflation was non-existent last month. The Bureau of Labor Statistics reported Wednesday that the consumer price index was unchanged in July. A nonexistent change in the prices of the typical basket of goods and services a household purchases might seem like the definition of no news. But digging into the report yields a few important takeaways.

First, despite the warnings of the gold bugs and Federal Reserve critics, inflation, which is the change of price level, remains very, very low. Over the past 12 months, the consumer price index (CPI) has risen a scant 1.4 percent. That’s below the historical average, and below the 2 percent level the Federal Reserve targets.

Second, “core” inflation remains muted. Economists typically use two different price indices used to measure inflation. The first is “headline” CPI, which is the entire consumer price index—i.e., all goods and services including food and energy.

“Core” CPI, however, is what economists and the Federal Reserve prefer to use to measure inflation because energy and food prices are affected by the volatile up and downs of the commodities market. If, for example, a drought strikes the corn belt and food prices spike in the fall, it would not make sense for the Federal Reserve to treat that as evidence that inflation is getting out of control. For consumers, however, the headline CPI is the most important, because it’s the best measure of how much they spend every month, and food and gas take up a huge portion of household spending. But the price of oil can rise and fall without any implications for how monetary policy should be conducted. Core CPI rose .1 percent in July, and has risen 2.1 percent over the past year, .7 percent higher than the headline index.

Third, energy prices are falling. The core figure is higher than the total figure in large measure because of the dramatic recent declines in energy costs—meaning gasoline, electricity, heating oil, and natural gas. Over the past year, the energy component of price index has fallen 5 percent, with natural-gas prices falling more than 12 percent. That decline can be attributed largely to the huge increase in natural-gas exploration and extraction in the United States. Oil prices —and so gasoline prices—have also seen significant declines over the past year. Even if food prices climb over the next few months because of the epochal Corn Belt drought, the large drop in energy costs can mitigate against households spending an ever-increasing portion of their paychecks on goods and services. And so far, food prices have increased modestly: .1 percent in July and 2.3 percent in the last year.

Fourth, health care is getting more expensive.

Why is the core number outpacing the headline one? A big part of the story is health care. The prices paid for health care continues to outpace the prices paid for everything else. In July, the prices paid for health-care services jumped .3 percent, and they have risen 4.4 percent since July 2011.

Finally, don’t expect consumers to rejoice at these numbers. If your wages are rising sharply while the prices of the stuff you buy every month are flat, you’ll feel wealthy. If your wages rise sharply while the prices of the stuff you buy are rising even more rapidly, you’ll feel poor. In this expansion, characterized by an extremely loose labor market, wages are barely keeping up with rising costs. Real hourly earnings—hourly wages less the change in the price index—were unchanged in July from June and are up a mere .2 percent from July 2011.