Inflation Watch

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 latest consumer price and producer price indices.

• There is no inflation at the moment in both the consumer price index (CPI) and the producer price index (PPI). However, the housing rent component is moving higher.
• In October, consumer inflation was only 0.9 percent over the past year. Falling gasoline prices (down by 10 percent) were the principle reason for the non-existent broad inflation. Likewise, inflation facing producers to buy their stuff before turning into consumer items rose by only 0.3 percent due partly to falling energy costs.
• Housing inflation continue to move up. Home prices rose at 12 percent, according to the NAR median price, and by 13 percent, according to the repeat-price measurement of Case-Shiller. However, home price is not part of the inflation measure since it is considered an asset, just as stock prices are not included in the inflation measure. What is included is the rent component. Rents paid by renters rose by 2.8 percent while homeowner equivalency rent rose by 2.3 percent. Be mindful that these rent components are the biggest weight to CPI. Energy prices tend to be volatile and any reversal in direction, combined with higher rents, could mean an uncomfortable position for the Federal Reserve.
• The Fed implicitly considers 3 percent inflation as the red line not to cross. And 3 percent inflation in 2014 is a distinct possibility. That will force the Fed’s hand to move away from the ultra-loose monetary policy sooner than planned. Higher mortgage rates will then be the case next year.
• One item of note with a major price change is coffee beans. The commodity price of coffee has plunged by over 60 percent in the past 3 years. Yet this mildly poisonous drink still carries hefty prices by fancy retail coffee shops, that is, we are getting ripped off at Starbucks. But we still stand in line as a form of escapism, not having to think about work for several minutes while pretending to speak a foreign language.
• It is worth remembering that coffee was prohibited in the Christian world and only began to be drunk in Europe from around 1600 after the Pope gave the go-ahead. Soon afterward, coffee was delivered on a land-route via Turkey to Venice, Verona, and Vienna. But after the discovery of the New World, the French planted beans in its tropical islands while the Spanish did it in Colombia. Not to be outdone, the Portuguese grew it in Brazil. The Dutch, with no real possession in America, had to sail around the globe and picked the Java Islands in Indonesia to get its coffee. Britain, not yet a power, had to settle for its traditional warm beer until it colonized Ceylon and India where tea leaves were found.