Consumer Price Inflation

In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses the consumer price index (CPI).

• Consumer prices are on the rise, though slowly. The latest consumer price index (CPI) increased by 2.0 percent from one year ago (very manageable inflation and nothing to worry about).  It also means that social security checks will get bumped up by roughly 2 percent next year. For those working, wages are a hair below inflation, with the wage rate rising 1.9 percent from one year ago. Though only a bare difference, it is a psychological blow to workers in not getting ahead of inflation.
• Rents rose by 2.8 percent, a continuing slow squeeze on renters to empty their wallets. Meanwhile the fuzzy figure of owner-equivalent rent (the hypothetical of what the homeowners would pay in rent if they were renting out their home) rose by 2.2 percent. Falling vacancy rates and fewer inventories of homes for sale assure that the housing component of inflation will tick higher in upcoming months. Home prices have been rising at a double-digit rate of appreciation but are not included in the CPI for the same reason that stock prices are not included as they are considered investment assets.
• Quite a measurable decline in medical service fees has been one key reason for the broader tame inflation figures. The latest increase was 2.6 percent compared to 4 to 6 percent annual gains in the past decade. Should the medical fees somehow revert back to higher inflation on top of rising housing rent costs, then inflation will get uncomfortable and will force the Federal Reserve to quickly raise interest rates. So far, inflation is not a concern, but it bears close monitoring.
• One huge negative consequence of rising inflation for the housing market, if or when it occurs, is that banks will have to charge higher mortgage rates in order to compensate for the loss in purchasing power of the returned money. Recall in the 1970s and early 1980s, mortgage rates were very high because inflation was high. Another negative worth watching is that the Federal Reserve will have to report a loss on its huge accumulation of bond purchases. (Econ 101: higher interest rate on a bond lowers the price of the bond). Though not a consequential event in terms of economic impact or the amount lost, there will be a political firestorm about why the Fed is losing money. This theatric show can be expected in 2015 or 2016.