There is no inflation to speak of as consumer prices did not change over the past 12 months to March. However, apartment rents continue to show heat with a 3.5 percent gain. If there were to be some rise in energy prices in the near future (after having fallen big time late last year), then the overall consumer prices could get uncomfortable and thereby nudge up interest rates.
Diving into the numbers, the Consumer Price Index (CPI) was unchanged over the 12 months. Along with rent, some prices such as of food, medical service, and college tuition were rising but the much lower gasoline and energy prices neutralized the overall price conditions.
Because of the volatility in food and energy prices, there is something called the “core inflation” which tries to gauge the inflation trend outside of these volatile components. The Federal Reserve monetary policy is also focused much more on the “core inflation” rather than “overall inflation”. In March the “core inflation” was 1.8 percent. This increase is still within the Fed’s comfort zone of keeping the inflation lid at 2 percent. So the Fed need not be in a hurry to raise interest rates – at least not yet.
However, rents are rising fast. The latest 3.5 percent rise matches the fastest gain in over 6 years. With apartment vacancy rates still remaining low, the continuing gains at this heated pace is likely to continue. In other items, the service fee related to tax return preparations rose by 6.6 percent from one year ago, good thing consumers only have to do this once a year.
Home prices are not part of the consumer inflation calculation, just as gold prices and stock prices are also not included in the inflation number. But, something called the homeowner equivalency rent – a hypothetical rent that homeowners would pay to live in their homes – is included. This component, though somewhat fuzzy in computation and assumptions, is rising by 2.7 percent. Therefore, both the renters’ rent and homeowner equivalency rent are rising fast enough to tip the overall inflation upward by the end of the year. The Federal will likely be raising interest rates later this year. September is the likely month.
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.