I have never been one to lose sleep over modest rates of inflation (2 percent to 4 percent), but I think that some of the reporting may have overplayed the low inflation in the November CPI. Both the overall and core CPI were flat, which brings the annual rate of inflation to -3.9 percent over the last three months, and just 1.6 percent in the core. While the negative rate in the overall CPI is obviously due to a one-time drop in energy prices, there were unusual factors pushing the core rate lower as well. For example, airfares (a core component that is largely driven by energy prices) fell by 4.8 percent in November. They have fallen at a 27.1 percent annual rate since July. Car prices, which account for 10.2 percent of the core index, fell 0.8 percent in November and have fallen at a 5.7 percent annual rate over the last three months. This is attributable to heavy discounting by the big three trying to pare their inventories of unsold cars. This pace of decline will not continue and may even be partially reversed in future months. It looks like Wal-Mart got into the picture also, as its $4 generic sales led to a rare 0.7 percent decline in the prescription drug index in November. I identify a couple of other seeming anomalies in my price byte. The basic story is that almost all the odd numbers look to be on the low side (hotel costs rose somewhat more than normal), which could mean price reversals in December and January. In other words, inflation may not be dead yet.
--Dean Baker
