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 latest Consumer Price Index (CPI).
- There was relatively benign inflation of 1.8 percent over the past 12 months. However, expect higher and higher inflation in upcoming months and years.
- A little spike in energy/gasoline prices was one reason for the upturn in the latest Consumer Price Index (CPI) reflecting conditions in June. Continued strengthening in global oil prices of late will further ripple into higher consumer prices in the upcoming months.
- Apartment rents rose by 2.9 percent, the highest growth rate in four years. The murky and fuzzy “homeowner equivalency rent” – which tries to measure what the homeowner would pay in rent if they did not own – rose by 2.2 percent, also the highest growth rate in four years. Based on low apartment vacancy rates and shortage of inventory, rents and equivalent rents will show bigger gains in the near future. Note: home price is not part of the consumer price index as homes are considered assets. Homebuyers will no doubt disagree.
- Based on the latest trend and likely occurrence in the upcoming months, the overall CPI towards the end of the year will be 2.0 to 2.5 percent. That is the amount of cost-of-living-adjustment social security recipients can expect next year. For those without a COLA clause – this may be some tough luck.
- It would be interesting to observe what the inflation will be in 2 or 3 years after the massive dose of printing of money (called formally Quantitative Easing) that occurred in the U.S. over recent years. Some tapering off on Quantitative Easing will likely happen later in the year. Though economics textbooks say inflation is a monetary phenomenon everywhere, most economists do not expect inflation to get out of hand in the U.S. because of continuing slack and a continued high unemployment rate in the U.S. My call, however, is for 4 to 6 percent inflation in 2015. I hope I am wrong because higher inflation will mean much higher mortgage rates as lenders need to compensate for the loss in purchasing power of money that is paid back.