Inflation alive and well in the service sector

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Shoppers looking at computers.

It looks like inflation hasn't really gone away.

You may be enjoying this year's drop in gasoline pump prices and the price of other commodities. But while you weren't looking, the cost of renting a guest room jumped 9.9 percent last month.

Amid signs that weak commodity prices could spell deflationary trouble for the economy, the rising price of services is offsetting those fears.

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Led by a steep slide in energy prices over the last 12 months, prices of a wide range of global raw materials—everything from iron ore to sugar—have been falling lately. That's prompted fears that deflation may worsen a global economic slowdown.

But in the U.S., those fears overlook the long-term growth of services, where price trends have been very different.

"We forget about this (services) component but it is nearly two-thirds of producer costs," economist Joel Naroff said.

"Trade, transportation, warehousing and government services all posted gains. This portion of the economy should provide a base for inflation," he said.

In fact, though consumers respond powerfully to changes in high-profile commodities like gasoline, roughly 63 percent of the government's main gauge of producer prices is devoted to tracking the change in the cost of hundreds of different services. The measure, the producer price index, is designed to give companies, analysts and policymakers an early warning to price changes before they flow to the consumer level.

Goods make up about 35 percent of the index, and construction costs just 2 percent, based on the latest weightings set by the Bureau of Labor Statistics every year.

Inflation watchers have recently focused much of their attention on the sharp price drop in energy and other commodities, as a glut of supply has collided with a slowdown in demand. Policymakers at the Federal Reserve are tracking prices closely as a sign of whether the U.S. economy is healthy enough to sustain a renewed rise in interest rates after an historic period of cheap money.

Falling prices are usually a sign that demand from companies and consumers is weak and that the economy may be hitting a soft spot.

But when the price of services is taken into account, inflation seems less tame than the recent weakness in commodity prices would indicate. Last month, producer prices overall were up 0.3 percent, which works out to an annual rate of 3.6 percent.

The latest numbers "add to the evidence of a now hard-to-ignore resurgence in core inflation over the past few months," said Stephen Murphy, an economist with Capital Economics. "For all the talk of global deflationary pressures this week, we suspect the Fed will be more focused on the growing evidence of mounting domestic inflationary pressures. A September rate hike is coming."

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While economists and policymakers focus heavily on the widely-reported "headline" numbers, the monthly report is intensely detailed. The main index is sliced and diced into thousands of individual readings, sampled monthly by an army of government researchers.

The list includes major categories like metals and other raw materials, but the basic index also tracks everything from "coin-operated amusement machines" to "dual purpose sleep furniture, including convertible sofas" to "heat exchangers and steam condensers (except for nuclear applications)" and "dump truck bodies, sold separately."

Services categories include broad areas like financial auditing, architectural services and legal advice. But the BLS also keeps a close eye on hundreds of other specific services from "membership dues, fitness and recreational sports centers" to "sales of blood and blood products, organs, and tissues."

Here's a sampling of last month's biggest gainers and losers.