Prices Byte By Dean Baker PRICES BYTE is published each month upon release of the Bureau of Labor Statistic's reprts on the consumer and producer price indexes. For more information or to subscribe by fax or email contact CEPR at 202 293-5380 ext. 206 or [EMAIL PROTECTED] ******** Surge in Energy Prices Propels Inflation Inflation at both the retail and wholesale level was sharply higher in January, as large increases in energy prices pushed the indexes upward. The CPI jumped by 0.6 percent, its biggest jump since a 0.8 percent rise last March, driven primarily by a 3.9 rise in energy prices. It has risen at a 4.2 percent annual rate over the last three months, and by 3.7 percent over the last year. The finished goods index in the PPI rose by 1.1 percent, as wholesale energy prices rose 3.8 percent in January. Outside of energy, inflation appeared far more tame, although it clearly has accelerated somewhat from very low levels of 1999. The core CPI (excluding food and energy) rose at 0.3 percent in January. It has risen at a 2.9 percent annual rate over the last quarter, and by 2.6 percent over the last year. By comparison, it rose at a 1.9 percent rate in 1999. Apart from the rise in energy prices, which will reduce consumers' purchasing power, the most troubling item in the CPI was a 0.6 percent rise in medical care prices. The rate of inflation in medical prices had slowed slightly, with the costs rising by 0.3 percent in each of the last three months. The 0.6 percent jump in January indicates that this slowdown was an aberration. Adding in the January leap, the annual rate of inflation in medical costs over the last quarter was 4.8 percent, compared to a 4.6 percent rate over the last year. There were a few anomalies in this month's data which had the effect of pushing the CPI slightly higher. Used cars prices were reported as rising by 0.9 percent in January; their actual rate of increase is probably closer to 2.0 percent annually. A January increase in telephone and postage prices pushed communications prices up by 0.3 percent; typically they have been falling at close to a 2.5 percent annual rate. The 1.9 percent rise in tobacco prices followed a 3.5 percent fall in December. Tobacco prices are not likely to continue to rise at this pace. However, the net impact of these unusual movements was small. The 2.9 percent annual rate shown in the core index over the last three months is probably a good measure of the underlying rate at present. The December PPI does provide some basis for concern that inflation in the core CPI could accelerate further in coming months. The core finished goods index rose by 0.7 percent. Much of this increase was attributable to anomalous jumps of 1.2 percent in new car prices and 5.6 percent in tobacco prices. It is also worth noting that the increase in the core index reported for December was revised down from 0.3 percent to 0.1 percent. Nonetheless, producer prices appear to be rising somewhat more rapidly than in 1999. The core finished goods index rose at a 3.3 percent annual rate over the last quarter and the core finished consumer goods index rose at a 4.2 percent rate over this period. By contrast, the core finished goods index rose by 0.9 percent in 1999, and the core consumer goods index rose by 1.2 percent. One of the main reasons for the higher rate of inflation in the finished goods index is the reversal in import prices. In the wake of the East Asian financial crisis, and the rise in the dollar, non-oil import prices fell at close to a 2.0 percent annual rate in 1998 and 1999. This decline has now been reversed, as non-oil import prices have risen by 1.6 percent over the last year. Now that the value of the dollar appears to have peaked, import prices are likely to continue to rise further. It is worth noting that none of the acceleration in inflation appears to be attributable to more rapid wage growth. In recent months wage growth actually appears to have slowed. This means that a Federal Reserve Board strategy that seeks to fight inflation by deliberately slowing the economy and raising the rate of unemployment will be missing its target.