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 producer price index.
- Inflation at the producer level is not concerning. The producer price index rose a tame 0.3 percent in August and by 1.4 percent over the past 12 months. This inflation measure captures the price pressure that producers are paying to buy stuff.
- Consumer prices generally follow the trends from producer prices. Both measures move similarly in terms of ups and downs, though not necessarily by the same magnitude. Over the past decade, producer prices increased 38 percent while consumer prices rose 26 percent. The difference in magnitude arises largely because many service items, like getting a haircut or paying college tuition, are accounted for in consumer prices but not in producer prices.
- Little inflation provides more room to maneuver for the Federal Reserve. The bond buying program (by printing money) can continue for a longer period. Some degree of ‘tapering’ of bond buying will occur soon, which is the main reason for the rise in mortgage rates over the past 3 months, but the pace of tapering can be slow rather than abrupt so long as inflation does not pop out.
- A complete end of bond buying will have to occur at some point, probably by the spring of next year. Printing of money forever is not a sustainable policy. When Germany did just that after the First World War, hyperinflation was the result. One widow farmer, aloof to economic data, sold a cow and then deposited the money in the bank. After a month, to her utter dismay, the retrieved money could only buy a can of sardines. Extreme politicians would have an easy time getting votes from people who feel cheated out of hard work.
- Fortunately in America today, the bond-buying program has not led to any degree of inflation. Consumer prices are up only 2 percent from one year ago. In the worst case scenario, consumer price may rise at a 4 to 5 percent rate in a few years. That is not hyperinflation and is not even the 1970s style double-digit rate of inflation.