Core Price Inflation

Each day the Research staff takes a look at recently released economic indicators, addressing what these indicators mean for REALTORS® and their clients. Today’s update discusses core price inflation.

• Today’s data show that consumer prices were unchanged in November for a total increase from one year ago of 3.4 percent.  The price of energy fell in the month offsetting price increases in food and all other goods.  Gas prices—which contribute about 5 percent to the overall CPI—have been roughly stable in December suggesting some stabilization in headline inflation in the next month.
• Core price inflation, a figure based on the index that excludes energy and food prices, has increased dramatically from 0.6 percent in October 2010 to 2.15 percent in November.  The rapid increase is notable, but stabilization at this inflation rate is generally considered to be a good thing for the economy.
• It would mean continued core inflation of about 2 percent, and headline inflation that will vary around this rate depending on the pattern of food and energy prices (which are more volatile than other prices).
• A two percent increase in core prices is near the top of the range that is generally expected to be the FOMC’s target for this type of inflation.  This means that the FOMC is unlikely to tighten their policy stance to combat inflation anytime soon.  In their December statement, the FOMC indicated that they expected the current accommodative monetary policy to be in place at least through mid-2013.  This means low mortgage rates are likely to persist for a while longer, but as the economy recovers, they could increase sharply.
• Digging in a bit, the CPI contains two rent variables: one for those who rent apartments or homes from others (a market transaction) and one for those who own a home (in this case, how much would rent be if they were to rent their home to someone else).  Both types of rent have increased in the last year with market rents increasing somewhat faster than the rate of core inflation.
• Increasing rents coupled with low mortgage rates and affordable house prices may cause some renters to consider a home purchase in lieu of extending their lease at the next opportunity.