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U.S. Services inflation
Nov 17, 2000

U.S. Services inflation has outpaced price hikes in goods since January 1995. The services component of the core Consumer Price Index, which less energy makes up for 70% of the core CPI, increased at a faster rate than goods inflation and reached 3.5% in August. This increase was 1% faster than core services inflation for 1999. More important perhaps, price increases took place in all services, with transportation having the largest increase of almost 2 percentage points. According to James C. Cooper and Kathleen Madigan of Business Week, this trend is a consequence of many services firms exercising their greater market power to cope with higher unit-labor costs. Higher service sector inflation and growing earnings by service sector workers that mount up to 77% of the workforce certainly strengthens their argument. In October 2000 average hourly earnings by services workers increased by more than 4% from the year before as a result of a tight labor market and new jobs that continued to appear in the sector. In fact, since the second quarter of 2000, services jobs have increased by more than 300,000, a notable difference from the more than 100,000 layoffs in manufacturing in the same period. However, Cooper and Mandigan may be underestimating service sector growth in labor productivity that would outweigh higher labor costs and take pressure off firms to increase prices. According to calculations presented in a paper by Andrew Sharpe and Leila Gharani of the Center for the Study of the Living Standars, services labor productivity averaged 2.9% growth from 1995 to 1999 and 4.3% growth in the first half of 2000. The argument also ignores fast growth of cross-border services imports that increased 10% in 1998 and 8% in 1999, and the 21% surge in sales of services by affiliates of foreign multinationals in 1998 that questions how much market power services firms enjoy. Maybe we ought to blaming demand for services as Madigan also suggests. Services account for 56% of all expenditure done by consumers according to Economy.com, an information website and many suggest that the share in producer consumption may be much higher.

Source: Cooper C. James and Kathleen Madigan in BusinessWeek 2 October, 2000, pages 41 and 42, and Business Week 4 November, 2000 pg 21, and Business Week 11 November, 2000, pages 33 and 34. Sharpe Andrew and Leila Gharani (October 2000). “The Productivity Renaissance in the US Service Sector.” Center for Living Standards. Paper available from Library section of this website. Bureau of Labor Statistics. Employment Situation: October 2000. Link available in this website.

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