Inflation Watch: March 2012

March 2012 Inflation Watch An Eye on Prices March 22, 2012 Next Release: April 13, 2012

Inflation Watch• Inflation (price-level growth) is important for REALTORS® because it can lead to shifts in interest rate policy by the Federal Open Market Committee (FOMC).• Generally, the FOMC lowers interest rates to stimulate the economy. However, rates that are too low may lead to inflation. To combat inflation, the central bank increases interest rates but this policy may dampen economic growth.• For example, the FOMC has extended its commitment to keeping rates low through late 2014 to help shore up economic activity, but this commitment comes with its own set of risks.

Inflation Watch• During the recent financial crisis, fears of deflation (price-level decline) were rampant. (Deflation caused a downward spiral of prices that destroyed the economy in the Great Depression.)• With financial markets somewhat stable, some fear that inflation is around the corner. Stagflation, another unpleasant economic condition characterized by high unemployment and high inflation, is also a possibility.• In stagflation, it is difficult for the central bank to raise interest rates to combat inflation due fear of further job market deterioration if demand is hurt by the increased interest rates.

March 2012 Highlights• A relaxation in monthly increases in the prices of food, household utilities, and medical services was not enough to offset other price acceleration such that the headline measure of consumer prices to was up 0.4 percent and producer prices were up 0.4 percent in the month as well.• Prices are noticeably higher than a year ago—by 2.9 percent for consumers and 3.3 percent for producers.• Core consumer prices (those excluding food and energy) are just outside the bound of the target range of 1 to 2 percent.• In part because prices are still within these bounds, the Fed has committed to continue the low-rate policy to late 2014 as noted in the January statement.• Some consumer prices are advancing at a considerable rate. Necessities such as meats, food at home, transportation, and hospital services are areas of concern because of the year over year increase, but the February easing in monthly price growth is a good sign.• The following tables summarize key figures while the graphs show increasing and decreasing prices for a few items.

Consumer and Producer Price Change Overview Monthly Annual ConcernIndicator Source and definition Change Change ?Consumer Price Index BLS, Price change of consumer goods 0.4% 2.9% Maybe(CPI) and servicesCPI Core BLS, CPI less food and energy 0.1% 2.2% MaybeCPI Housing (owners’ BLS, CPI housing component 0.1% 1.8% Noequivalent rent) (primary residence)Producer Price Index BLS, Price changes domestic 0.4% 3.3% Maybe(PPI) producers receive for their outputPPI Core BLS, PPI less food and energy 0.2% 3.0% MaybePPI Crude Materials BLS, PPI crude / raw materials 0.4% 0.7% NoPPI Residential BLS, PPI BRES 0.8% 4.4% YesConstructionGold WSJ, Price per ounce of gold 5.0% 27.5% YesWest Texas Crude Oil WSJ, Price per barrel of oil 2.0% 14.1% Yes BLS, Trade-weighted index measuresImport Prices 0.4% 5.5% Yes prices of imported goods & servicesConstruction Cost Census, constant quality, new single -1.1% -0.8% NoIndex family homes under construction

Looking at the CPI in More Depth Change from Change from Indicator Concern? previous month previous yearConsumer Price Index (CPI) 0.2% 2.9% MaybeLodging away from home 0.2% 2.3% NoFood at home 0.0% 5.3% YesMeats, poultry, fish and eggs 0.2% 7.2% YesHousing fuels and utilities -0.4% 1.9% NoHousehold furnishings & 0.1% 1.0% NooperationsTransportation 0.3% 5.0% YesMedical care 0.3% 3.6% MaybeHospital and related services 0.3% 5.3% YesEducation 0.3% 4.4% MaybeAirline fare -0.9% 1.8% NoPersonal Computers and 0.0% -11.8% Noperipheral equipmentApparel 0.9% 4.7% Maybe

CPI-U: All Items Less Food and Energy % Change - Year to Year SA, 1982-84=100 CPI-U: All Items % Change - Year to Year SA, 1982-84=1006420-2 07 08 09 10 11 Source: Bureau of Labor Statistics 02/28/12

CPI-U: Owners Equivalent Rent/Primary Residence % Change - Year to Year SA, Dec-82=100543210-1 02 03 04 05 06 07 08 09 10 11 Source: Bureau of Labor Statistics 02/28/12

PPI: Finished Goods % Change - Year to Year SA, 1982=100 PPI: Finished Goods less Food and Energy % Change - Year to Year SA, 1982=10012 8 4 0-4-8 07 08 09 10 11 Source: Bureau of Labor Statistics 03/22/12

Cash Price: Gold Bullion, London Commodity Price, PM Fix US$/troy Oz18001600140012001000 800 600 07 08 09 10 11 Source: Wall Street Journal 03/22/12

Domestic Spot Oil Price: West Texas Intermediate $/Barrel140120100 80 60 40 20 02 03 04 05 06 07 08 09 10 11 Source: Wall Street Journal 03/22/12

Import Price Index: All Imports NSA, 2000=100150140130120110100 90 01 02 03 04 05 06 07 08 09 10 11 03/22/12

Houses under Construction: Fixed-Weighted Price Index NSA, 2005=100 NAR Median Sales Price: Total Existing Homes, United States $110 240000105 220000100 200000 95 180000 90 160000 85 80 140000 02 03 04 05 06 07 08 09 10 11 Sources: Census Bureau, National Association of Realtors 03/22/12

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Inflation Watch: March 2012

by REALTORS on Mar 23, 2012

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