Inflation Outlook

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 CPI and the outlook in inflation.

• After a virtually non-existent rise in consumer price index (CPI) in the recent years, inflation looks to kick higher starting in 2015.
• Inflation in January remained tame, up 1.6 percent over the past year.  But the subcomponents on housing related prices have risen close to 3 percent.  Rents rose at a 2.9 percent clip, while the mysterious and murky homeowner equivalence rent increased by 2.5 percent, the highest pace in nearly 6 years.  The latter is hypothetical and not actual market exchange data of what homeowners would receive in rent if their home was rented out.
• Both rent and homeowner equivalency rent are bound to increase further since apartment vacancy rates, and the number of homes available for sale/rent, have been falling.   These housing components carry the biggest weight in CPI calculations and therefore will exert upward pressure on the broad inflation figure.
• Energy prices have also begun to inch higher.  Though gasoline prices are not necessarily moving higher from already new normal levels, natural gas prices are and could even break higher if the situation in Ukraine/Russia does not simmer down.
• The Federal Reserve prefers the inflation rate to be at between 1 to 2 percent.  It considers 3 percent as the red line not to cross.  However, the line could easily be crossed next year, possibly prompting a quicker tightening in monetary policy and notably higher interest rates.
• After increasing by only 1.4 percent in 2013, CPI is expected to rise by 2.5 percent this year and then move even higher to 4 percent next year for the reasons state above.  Rising inflation also means higher interest rates.  However, the possibility of a double-digit inflation rate, as occurred during the 1970s, is zero.
• The purpose of measuring inflation is to check on our standard of living, to see how much of our earnings are getting eaten away by higher prices.  The daylight savings time adjustment means we lost one hour of potential work while needing to pay fixed monthly expenses like rent.  This we know reverses in autumn.  But one time in England, the country decided to switch to the more accurate Pope Gregorian calendar time like the rest of Europe and be done with the clunky Julius Caesar calendar.  This adjustment meant a sudden advancement of 12 days at the flip of a finger from September 2, 1752 to September 14, 1752.  Laborers lost work days, while their monthly rent was quickly coming due.  Riots ensued.