Higher Inflation Rate Leads to Declines in Real Earnings

The report on October inflation, released Nov. 14, was noticeably different than last month’s. Overall, the consumer price index rose by 0.3 percent over September’s values. Recall that September’s numbers were up only 0.1 percent from August levels. While this month-over-month change would convert to an annual rate of over 3 percent, the actual year-over-year change from October 2017 levels is only 2.5 percent.

Gasoline price increases were a significant contributor to the rise in CPI. The report pegged gasoline costs as up 3 percent from the month earlier, 16 percent higher than a year ago. Fuel oil costs were up 3.7 percent from September as households are filling tanks, and up 26 percent from last year. Energy costs associated with electricity were also up more than 2 percent but have risen less than 1 percent from last year. Natural gas costs, on the other hand, were down 0.6 percent and are off more than 2 percent from a year ago.

The other category showing a more than 2 percent month-over-month increase was used cars and trucks, up 2.6 percent this month after being off 3 percent the month before. On an annual basis, used car and truck prices are only up 0.6 percent.

Food prices dipped a 10th of a percent, with at home food costs down 0.2 percent and away from home food up a 10th. Compared to a year ago, at home food prices are all but unchanged, with away from home food costs up 2.5 percent. Within the food category, fruits and vegetables were down 0.7 percent, cereals and bakery goods down 0.6 percent with dairy off 0.4 percent. Meat and related animal protein prices were unchanged for the month.

The core CPI – the index without energy and food costs incorporated – was up 0.2 percent over September when the core index was also up 0.2 percent. Shelter costs, rent and the owners’ equivalent of rent rose by 0.2 and 0.3 percent, respectively. Shelter costs, rent and the owners’ equivalent of rent is the largest single component of the CPI, accounting for nearly a third of the overall index.

This slightly higher inflationary measure this month combined with a 0.2 percent increase in nominal earnings to give a 0.1 percent decline in real earnings. Measured on a year-over-year basis, real earnings are up 0.7 percent.

Going forward, energy and food costs are likely to continue to moderate price pressure. The oil supply glut and depressed agricultural commodity prices should both contribute to price moderation. Labor costs and the flow-through effects of higher tariffs, however, will likely add to cost increases and to the extent they are able, manufacturers and retailers will try to move those higher costs through the system. So far, the Federal Reserve target for inflation in the 2-3 percent range seems to be well in line with the data.