Consumer Price Index, 2004: Consumer Inflation Was Higher in 2004, Reflecting Higher Prices for Energy, New and Used Motor Vehicles, and Shelter

Wilson, Todd, Monthly Labor Review

The Consumer Price Index for All Urban Consumers (CPI-U) for All Items for the U.S. city average increased 3.3 percent in 2004, up from a 1.9-percent rise during the prior year. (1) Last year's acceleration in this index largely reflects higher price increases for energy (motor fuel and household fuels), new and used motor vehicles, and shelter. Other components contributing to the acceleration include the upturn in the index for household furnishings and operations; a smaller decline in the apparel index; a larger increase in prices for professional medical services; an upturn in the cigarettes index; and a larger increase in prices for water and sewerage maintenance. These higher increases, compared with 2003, offset lower food inflation and declining airline fares.

Excluding both food and energy, slightly higher commodity prices contributed to the acceleration in the all items index last year. The index for commodities less food and energy index rose 0.6 percent last year, after decreasing 2.5 percent in 2003. Commodities are generally subject to greater global competition than services, and generally increase in price less than services. Durable commodities prices (including vehicles, furniture and bedding, computers, and so forth) increased 0.4 percent in 2004, after decreasing 4.3 percent during the prior year. Largely reflecting higher prices for gasoline and household heating (fuel) oil, the nondurables index rose 4.8 percent in 2004, following a 2.4-percent advance during the earlier year. The aggregate commodities index rose 3.6 percent in 2004, following a 0.5-percent increase in 2003. Services inflation accelerated last year, increasing 3.1 percent, compared with 2.8 percent in 2003, largely reflecting higher prices for shelter and medical care services.

The CPI-U excluding food and energy prices increased 2.2 percent in 2004, after rising 1.1 percent in 2003.2 (See table 1 .) According to a 2004 Federal Reserve Board monetary report to Congress, this index accelerated last year, in part, as a consequence of the indirect effects of three sources of higher business costs that were passed on to consumers. First, businesses paid sharply higher energy prices. Second, the depreciation of the dollar against major world currencies over the past 3 years led to an increase in non-oil import prices in 2004. Third, global prices for primary commodities surged last year--for example, for metals such as iron, steel, copper, and aluminum. (3)

Other price measures

The Producer Price Index (PPI) for finished goods increased 4.1 percent last year, compared with 4.0 percent in 2003. Excluding food and energy, the PPI for finished goods increased 2.2 percent in 2004. The PPI for intermediate materials less foods and energy increased 8.3 percent last year. The l, PI for crude nonfood materials less energy increased 20.1 percent in 2004. Various domestic (and imported) metals prices, which are crude commodities, advanced dramatically in 2004. Iron and steel scrap prices rose 48.6 percent, while copper base scrap prices increased 35.5 percent. The PPI does not reflect changes in import prices.

Excluding petroleum, import prices advanced 3.7 percent in 2004, the highest increase in 10 years, following a 1.2-percent increase in 2003, as measured by the Import Price Index. The base metals and articles of base metal import price index--which represents nearly 6 percent of the All Commodities import price index--rose 26.7 percent, reflecting double-digit increases in prices for iron and steel; articles of iron or steel; copper and articles thereof; aluminum and articles thereof; and miscellaneous nonferrous metals and articles, including scrap.

A 2005 Federal Reserve Board monetary report to Congress suggests that even though the value of the dollar has declined against most major world currencies since early 2002, most exporters to the United States seem to have avoided raising prices in 2002 and 2003 in an effort to maintain their market share. During that time, many exporters to this country apparently decided to absorb declining dollar values by reducing their profit margins, rather than resorting to raising dollar prices. However, by 2004, the dollar's value had declined to such a low level that many exporters to this country increased prices to offset the increasing cost of exchanging dollars for foreign currencies? After peaking in 1995, import prices excluding petroleum in this country declined at an average annual rate of 1.2 percent through 2003. Prior to 2004, these declining import prices damped input costs for many businesses in this country. Furthermore, these lower import prices have inhibited price increases by domestic firms facing import competition.

Energy and food prices

Energy. Energy prices increased strongly in 2004, 16.6 percent, after rising 6.9 percent in 2003. The energy index, which represents about 8 percent of the All items index, comprises two fairly equally weighted components: motor fuel and household fuels. Energy commodity prices, mainly gasoline and home heating (fuel) oil, rose 26.7 percent. Energy services charges--gas (piped) and electricity--rose 6.8 percent. (5)

Last year, sharply higher crude oil prices led to increases for, among others, two crude oil products: gasoline and fuel oil. Both crude oil and fuel oil inventory levels remained in the lower half of a 5-year range throughout 2004. Meanwhile, during the first half of 2004, gasoline inventory levels fell in the lower half of such a range. Gasoline prices increased 26.1 percent in 2004, after increasing 6.8 percent in the prior year. Fuel oil prices rose 39.5 percent in 2004, after rising 7.8 percent during the earlier year.

During 2004, crude oil prices soared as the world's oil-production capacity utilization neared historically high levels, and as the world's demand for oil continued to rise strongly. Last year, oil prices rose sharply despite a 7.5-percent increase in the average daily number of barrels of petroleum supplied by the Organization of Petroleum Exporting Countries (OPEC)--from 30.6 million in 2003, to 32.9 million in 2004. OPEC petroleum production in 2004 accounted for about two-fifths of the world's petroleum production. (6) (OPEC holds about two-thirds of the world's proven oil reserves.) (7) According to the U.S. Department of Energy's OPEC Revenues Fact Sheet, the following events during 2004 contributed to the sharp advance in prices for world crude oil and its products, including gasoline and fuel oil. (8)

* low stocks of crude oil stored commercially

* uncertainty about the size of Iraqi oil exports amid the continuing terrorist attacks on that country's oil infrastructure

* disruptions in U.S. Gulf Coast and offshore oil production following Hurricanes Charley, Frances, and Ivan, with Ivan being the most severe

* a surprisingly large increase in world demand for crude oil--especially from China, accompanying that country's economic expansion

* worldwide oil production capacity constraints

* Venezuelan political instability …

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Publication information: Article title: Consumer Price Index, 2004: Consumer Inflation Was Higher in 2004, Reflecting Higher Prices for Energy, New and Used Motor Vehicles, and Shelter. Contributors: Wilson, Todd - Author. Journal title: Monthly Labor Review. Volume: 128. Issue: 4 Publication date: April 2005. Page number: 3+. © 1999 U.S. Bureau of Labor Statistics. COPYRIGHT 2005 Gale Group.

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