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

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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. …