Inflation in March

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 the consumer price index.

• The overall consumer price index (CPI) rose modestly by 1.5 percent in March from one year ago.  A drop in monthly energy prices was the reason for the deceleration in inflation.
• However, the housing component is rising.  Rent is now up 2.8 percent in March from one year ago.  The fuzzy and murky homeowners’ equivalent rent – a hypothetical figure of what the homeowner would pay to rent out her home and certainly not a market exchange - is up 2.1 percent.  These two housing components make up about 30 percent of the total weight to computing CPI.  Furthermore, the apartment rent measured by REIS, a private company, is showing slightly higher rent growth than as indicated by the government.
• If the homeowners’ rent in the near future were to rise close to the renters’ rent or even higher to the private sector measure of rent, then CPI would rise above the preferred inflation rate of the Federal Reserve.  A measurably higher CPI will throw off the long-term outlook of the social security trust fund (since the benefit payments are tied to CPI) and the budget deficit into a mess.
• Regarding other notable components of CPI, water/trash fees rose by 5.2 percent.  Moving and freight fees fell by 0.8 percent.  Medical care service fees rose by 3.9 percent.  College tuition and fees rose by 4.5 percent.
• The outlook is for about 2.5 percent CPI growth for all of 2013.  Then inflation is likely to kick higher to 4 to 5 percent in 2014 to 2015 if housing rent components continue their upward trend.  Current housing shortages in the inventory of homes available for sale and falling apartment vacancy rates clearly hint towards higher future rents.  Higher inflation will automatically mean higher mortgage rates.