There is no inflation in the latest data. However, prepare for higher inflation and likely higher mortgage rates later in the year because the impact of non-inflationary pressure from low gasoline prices will have mostly dissipated by November.
Specifically, consumer price inflation was unchanged in May over the past 12 months. The rising prices of food, medical services, apartment rents and many other items were all negated by a deep price dive in gasoline prices, which were 25 percent below last year.
Keep in mind that gasoline prices started to decline from November of 2014. Therefore, by November of this year gasoline prices will no longer show a large plunge. Consumer prices of all items will then show positive growth – probably in the 3 percent range. Knowing that long-term interest rates generally follow inflationary trends, one should expect some upward pressures on mortgage rates.
One of the key components pointing towards higher inflation is related to rents. Rents paid by renters continue to remain elevated, rising at 3.5 percent which would be essentially at a 7-year high; while the hypothetical rent a homeowner would pay if they were renting out their home rose by 2.8 percent, which is technically a 7-year high. In short, housing costs are rising and this will put upward pressure on the overall consumer price inflation in the near future.
Home prices are rising at 8 percent in the latest NAR data. But this is not part of the consumer price inflation since home is considered as an asset. Stock prices similarly are also not included as part of consumer inflation. For homeowners with mortgages nearly all have a 30-year fixed rate mortgages so their monthly payments are fixed and not rising. For one-third of homeowners who have paid off their mortgages, they have zero monthly payments – a goal we should strive towards for our advanced years.
As an aside there is “inflation” or “deflation” unrelated to prices. Given human nature and the forces of market to better satisfy those human desires, countable figures have changed over time. Today’s students are said to receive “grade inflation” where we now have many high GPA students, but not necessarily more Einsteins. When Babe Ruth hit an unheard of 29 homeruns in 1919, thereby feverishly exciting the fans, the ball was made lighter for the next season. The Bambino then knocked 54 balls out of the park in 1920.
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.