Inflation is slowly and steadily picking up. Rents in particular are rising at a 4 percent annualized rate. The sluggishness in new home construction assures that rent and the broader consumer price inflation will likely be on an upward trend.
In June, CPI inflation was up 2.1 percent. Such a rate is a tad higher than what the Federal Reserve likes to see. If sustained or even pick up to a higher pace, then the Fed will have no choice but to raise interest rates sooner than planned.
One consistent driver of inflation has come from the housing component. Rents are up 3.2 percent from one year ago, the highest in 5 years. Rents on an annualized basis have been trending at 4 percent growth rate for the 4 consecutive months. Such an increase will push up the overall CPI inflation given that the housing component is the biggest weight on the index.
Home prices according to the Case-Shiller index have been rising at a double-digit rate of appreciation even though NAR’s median home prices are rising now by 4 percent. But home price is not considered part of CPI inflation just as the stock market prices are not included. What is included is something fuzzy called the homeowner equivalence rent – which measures what a homeowner would hypothetically charge to rent out their owner-occupied home. No sane homeowner computes this. However, there are government employees who do this for you. And this homeowner equivalency rent has been rising at 2.6 percent. Given that renters are facing stronger inflation, it seems inevitable that this figure will accelerate higher in the upcoming months.
One other noteworthy price is the price of energy. Consumer energy prices, including gasoline, are up 3.1 percent. But crude oil prices are up more strongly at 10 percent (West Texas Oil). So there could be stronger consumer energy prices in the near future.
Some countries’ economies are heavily dependent on oil. If oil prices were to fall meaningfully then it can ruin the country’s economy. Russia is one. The last oil price collapse was in the mid-1980s, which precipitated the eventual collapse of communism. If oil prices were to go down to $75 per barrel, Putin is likely to be history.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.