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Services Inflation
Dec 21, 2000

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  • In the past months inflation in the services sector raised concerns among experts. 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 averaged 3.5% in November. This hike in prices was still faster than consumer inflation for the economy as a whole, which increased by 3.4% last month according to figures published by the Bureau of Labor Statistics. Continuing with a trend observed since 1999, price increases took place in all services, with transportation prices led by air cargo and passenger fares increasing by over 5% since November 1999 (Graph 1).

    While more expensive fuel costs may explain the fast rise in transport prices, James C. Cooper and Kathleen Madigan of Business Week have pointed out that the trend observed is a consequence of many services firms exercising greater market power to cope with higher unit-labor costs. Service sector hourly earnings in November were up by 4% from the same month the year before as a result of a tight labor market and over a hundred thousand new jobs in the services sector (Graph 2). These results would seem to confirm the hypothesis of services increasing prices to cope with higher labor costs.

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