January 2012 Inflation Watch An Eye on Prices January 20, 2012 Next Release: February 17, 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 committed to keeping rates low through mid-2013 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.
January 2012 Highlights• December price growth moderated or declined for items such as lodging away from home, food prices, home fuels and utilities.• This caused the headline measure of consumer prices to be flat for a second month while producer prices declined. However, strong previous price growth means that prices are still noticeably higher than a 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 near the upper edge of the bound.• December’s continued relaxation in price growth means that the Fed will likely continue the low-rate policy to which it is committed through mid- 2013. Some even suspect additional easing by the Fed.• Some consumer prices are advancing at a considerable rate. Necessities such as food at home and hospital services are areas of concern.• The following tables summarize key figures while the charts 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 0.0% 3.0% No(CPI) and servicesCPI Core BLS, CPI less food and energy 0.1% 2.2% MaybeCPI Housing (owners’ BLS, CPI housing component 0.2% 1.8% Noequivalent rent) (primary residence)Producer Price Index BLS, Price changes domestic -0.1% 4.8% Diminishing(PPI) producers receive for their outputPPI Core BLS, PPI less food and energy 0.3% 3.0% MaybePPI Crude Materials BLS, PPI crude / raw materials -1.1% 6.4% DiminishingPPI Residential BLS, PPI BRES -0.1% 4.8% NoConstructionGold WSJ, Price per ounce of gold -4.3% 19.0% YesWest Texas Crude Oil WSJ, Price per barrel of oil 1.4% 10.7% Yes BLS, Trade-weighted index measuresImport Prices -0.1% 8.5% Yes prices of imported goods & servicesConstruction Cost Census, constant quality, new single 0.1% 1.1% 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) 0.0% 3.0% NoLodging away from home -0.2% 2.0% NoFood at home 0.3% 6.0% YesMeats, poultry, fish and eggs 0.7% 7.9% YesHousing fuels and utilities -0.2% 2.4% NoHousehold furnishings & 0.1% 1.0% NooperationsTransportation -0.7% 5.2% DiminishingMedical care 0.4% 3.5% MaybeHospital and related services 0.5% 5.3% YesEducation 0.3% 4.6% MaybeAirline fare 0.2% 4.5% MaybePersonal Computers and -2.3% -12.5% Noperipheral equipmentApparel -0.1% 4.6% No
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 01/20/12
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 01/20/12
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 01/20/12
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 01/20/12