The annual inflation rate continues to rise in January as the COVID-19 cases are falling and the vaccine is becoming available to more Americans. Over the last 12 months, the inflation rate rose 1.4%, compared to 1.4% and 1.2% in the last two months respectively. In the meantime, economists and policymakers typically pay close attention to core inflation, which is the overall inflation rate excluding Food and Energy. In January, core inflation also rose to 1.4%, remaining well below the Federal Reserve's 2.0% core target.
One major component of the inflation rate is associated with the cost of housing. Specifically, rents rose by 2.1% over the past 12 months to January. However, compared to the previous month, rents are rising at a slower pace, meaning that demand for rental homes has fallen off a bit. In the meantime, migration data from the Census shows that there were more movers who relocated because they wanted to buy a home instead of renting, compared to pre-pandemic. Most of these people seem to be moving out from principal cities and buying homes in the suburbs. So, expect rents to soften further in 2021, particularly in the principal cities.
Meanwhile, median home prices—not included in the CPI measure—continue to rise due to the combination of very strong demand for housing and record low supply of homes for sale. Housing supply was limited before the pandemic and is even more limited now. Specifically, homes are sold within three weeks, while home prices rose 12.9% nationwide in December compared to a year earlier. Fast-rising home prices erode affordability making it harder for many first-time homebuyers to achieve the American Dream. However, owners are able to increase their home equity, in terms of wealth creation. In 2020, the typical owner was able to accumulate $25,000 in equity due to home appreciation.