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 committed to keeping rates low through 2013 to help shore up economic activity, but this commitment comes with its own set of risks.
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.
Price growth in the month of October moderated or even declined in a variety of headline measures such as the consumer price index, gold prices, and many producer price indexes. However, strong price growth in previous months means that prices are still noticeably higher than one year ago.
Among consumer goods, only prices for computers and peripheral equipment have declined over the year. The total CPI along with lodging away from home, housing fuels and utilities, transportation, and airline fares saw price declines in October though they are still up compared to one year ago.
While core (those excluding food and energy) and headline consumer prices are within the bounds of the target range: 1 to 2 and 2 to 4 percent respectively, they are approaching the upper edge of the bound. October’s relaxation in price growth means that the Fed will likely continue the low-rate policy to which it is committed through mid-2013.
Some consumer prices are advancing at a considerable rate. Necessities such as transportation, food at home, and housing fuels and utilities are areas of concern.