Consumer Price Inflation

  • Consumer prices (CPI) fell 0.7 percent in January as declines in gasoline prices more than offset increases in food and shelter prices.  Core inflation, a measure that excludes volatile food and energy prices, increased 0.2 percent for the month.
  • While the headline rate of inflation shows a decline of 0.1 percent or slight deflation, core inflation at 1.6 percent is just below the Federal Reserve’s 2 percent inflation target[1].  Earlier this week, Chair Yellen testified to Congress and noted that, “The Committee expects inflation to decline further in the near term before rising gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”
  • Today’s data seems to be in line with the Federal Open Market Committee’s (FOMC) expectations as enunciated by Chair Yellen, so the FOMC is likely to stay the course on an eventual tightening, generally expected in the second half of this year.  This is the last CPI data that will be publicly available before the next FOMC meeting on March 17-18 when the committee may decide to drop the word “patient” from the FOMC statement, signaling that an increase in the federal funds rate could come in the next few meetings if the economy continues to improve.
  • While overall prices are lower and core inflation is under the 2 percent target, prices of certain items are rising faster than that which might make some consumers feel that prices are increasing faster than the official rates suggest.
  • For example, rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose by 3.4 percent from a year ago in January.  This was the 10th consecutive month of growth above 3 percent for this rent.
  • When rents are rising, it becomes more attractive to own a home.  Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
  • Owner’s equivalent rent of residences (OER), a measure to approximate price change for owner-occupied housing, rose 2.6 percent in January[2].  This was the 14th consecutive month of growth at or above 2.5 percent for OER.  Together, the two rent components contribute more than 30 percent to the overall CPI, but if a renter is putting more than 30 percent of his or her income toward rent, then he or she will feel the squeeze of the increase in rents more than is suggested by the official index.
  • Real estate agents may be happy about the energy offset.  In spite of increases in rents, energy prices were lower, especially gasoline prices which are down 35.4 percent from a year ago.  The 2014 Member Profile shows that the typical REALTOR® spent $1,860 on expenses for the business use of a vehicle in 2013, an amount equivalent to 28 percent of the typical REALTOR® total real estate expenses in the same time period.
  • While agents can enjoy this benefit now, it may not be quite as big in the future.  Daily oil prices are already up 15 percent from the low price they hit in late February though they remain substantially lower than they were one year ago.
Food & energy
owners equivalent
market price

[1] While the Fed does not target this specific measure, the factors driving the Fed’s preferred measure of inflation are the same.

[2] Owners do not actually pay the increased costs. OER is intended to estimate the change in the amount of money that an owner could rent their home for if they did not live in the home.  This estimate is included as a factor in the CPI so as to lessen the effect of variation in the home ownership rate on the price series.

Danielle Hale, Director of Housing Statistics

As a Research Economist at NAR, Danielle studies tax issues, the wealth impact of home ownership, and different measures of home prices.

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