Two Messages From September's Consumer Price Index

There are two messages to be taken away from today's release of the September CPI.

1) Core inflation continues to show no evidence that would support the concerns of those who argue that there is a considerable risk of deflation ahead. That measure of inflation actually rose a solid 0.2% last month, leaving its year-on-year increase at 1.5%. In the last six months, core inflation has been running at 1.9%, while its 3-month annual rate (by definition, given the shorter period, more prone to noise) is running at a 1.3% rate.

While it is true that the overall CPI is down 1.4% from a year ago (a significantly smaller decline compared to a couple of months ago, when its year-on-year reading was -2.1%), that much less meaningful measure of inflation has still risen at an annual rate of 2.9% in the last six months and 2.5% in the last three months. The reason for the attention-getting discrepancy between the year-on-year reading of the headline CPI and its most recent annualized rates is that the former reflects the dramatic collapse in energy and commodity prices in the second half of 2008, as the global recession was settling in. Those negative year-on-year readings for the headline inflation are likely to evaporate by early 2010. In any event, it is always of course core inflation that matters, and this is, predictably, softening- but not nearly at a pace that could raise the anxiety level over the possibility of deflation.

2) The medical care component of the CPI (representing approximately 6.5% of the total index) rose by a robust 0.4% in September, bringing its year-on-year increase to 3.6%. In the last six months- in the midst of the recession that has generated an overall unmistakably disinflationary dynamic- medical care has risen by 3.6%, with the "hospital and related services" sub-category rising by 6.6%.

This should put to rest any lingering doubt that heath care costs are defying gravity and are disconnected from the broader economic environment and overall price trends in this country, screaming to be brought under control. Credible press reports that (during the unfolding open-enrollment period when employees are selecting their health plan for next year) the cost of coverage is up by double-digit numbers compared to last year, are rounding out the bleak state of spiraling health care costs in this country. Congress has already done a frustratingly inadequate job at addressing the cost containment aspect of health care reform legislation in the various bills thus far in the process. One would only be justified to feel dispirited by the prospect of ultimate success on that front in any final legislation , now that the free-for-all among a myriad of special interest groups has been unleashed to influence the ultimate outcome over the coming weeks.


Anthony Karydakis