There’s a little more evidence this morning that the economic expansion is in a soft patch, as the Consumer Price Index fell 7/10^ths of a point in data released this morning by the Department of Labor.

But to really understand what’s going on, you need to look below the headline, said Bob Hughes, senior research fellow at the American Institute for Economic Research. Much of the drop in prices we saw in this morning’s report came from lower energy commodity prices, but that doesn’t give a broader picture of the economy, Hughes said. Food prices were essentially flat in January, so that’s not it either, he said.

The real story is the softness over the last few months in prices of “core” goods, like clothing, automobiles and recreational equipment like televisions, offset by the rising prices of services, Hughes said. Apparel prices have been down for four of the last six months, and prices of transportation commodities like cars, trucks and parts have been down five months in a row, he noted. Prices of recreational commodities like TV’s, audio equipment, sporting goods, toys and reading materials have been down four months in a row, and eight of the last nine months, he said.  

The service category is still seeing higher prices in housing, medical care services, and education, he noted. This, he said, creates a “very divergent view of inflation.” The prices of goods are dropping because of higher productivity, but when it comes to services, “a barber can only give so many haircuts per hour,” Hughes said. Global competition is also helping drive the cost of goods down, but services are not tradable, so providers have less competition and can raise prices a bit more easily, he said.

It all adds up to prices of core goods that are slightly higher than they were a year ago, but with a rate of growth that is slowing down, Hughes said. And that, he said, adds some support to the idea that the economic expansion is in a soft patch.