CPI, PPI Internals Paint Less Horrendous Picture

Energy is responsible for almost all of the contraction. Still, there isn't much pricing power.
By Nat Worden ,

News that the macro trend in prices turned down last month roiled the markets and sowed fears the American economy is on the brink of a Japan-like period of profit stagnation. Can anything more specific be divined from looking at the individual components of the consumer and producer price indices?

Certainly, falling oil and gasoline prices in the aftermath of war in Iraq were largely behind the dramatic drops in both indicators, which are released monthly by the Bureau of Labor Statistics. Both declines, 1.9% and 0.3%, respectively, for the month of April, followed rising prices in March and surprised economists, who were expecting much smaller dropoffs.

In April, the index for gasoline prices, which rose sharply in the first three months of 2003, decreased 8.3% after seasonal adjustments. The average price of gasoline sank from $1.79 to $1.70 per gallon. The energy price index fell 4.8%. While the housing price index, which includes fuel oil prices, declined by 0.1%, shelter costs, which includes rent and ownership costs, actually increased. Fuel oil prices plunged 14.9%. Still, they were 31.5% higher than in April 2002.

The volatility of energy prices are the result of a unique set of geopolitical circumstances that can be separated from the underlying health of the economy. In fact, many economists point to the core index, which excludes volatile food and energy items. The core PPI fell 0.9% in April, and the core CPI was unchaged.

Ken Goldstein, an economist at the Conference Board, pointed out that if the core PPI is adjusted to remove incentives for automobiles, the index actually rose by 0.2% in April.

However, the CPI is the most important gauge of inflationary conditions for the government. A closer look at the individual components of this index shows that, while price declines resulting from oil are almost solely responsible for the historic drop in the index, few sectors evinced any real pricing power.

The core CPI has been gradually slowing for the past six months. Prices for clothing have been trending downward for the last nine months, posting an average decline of 0.6% in April. Prices for medical care were up 0.2%, education costs rose 0.5%, tobacco products climbed 0.1% and cosmetics went up 0.5%. But prices for communication services slipped 1%, entertainment and recreational prices sunk 0.1%, and personal computers fell 1.6%. Also, the prices of most food and beverage items declined 0.1%. The average price for a half-gallon of ice cream was $3.85 in March. In April, it was $3.29.

Bruce Kasman, a chief U.S. economist at

J.P. Morgan

, was expecting the core CPI to rise 0.1%. He was mildly surprised when it remained flat. "It's mostly a reflection of falling energy prices, but it also shows the weakness that exists right now in the industrial sector here and around the world," he said. "I think we will continue to see the inflation rate go down, but I don't think we're seeing an inability in our policymakers to act and make effective decisions, and I don't think we're going to see real deflation in this economy."

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