The overall consumer inflation was virtually unchanged in February but some components are picking up steam thereby raising the prospect of a higher inflation and higher interest rates next year.
Specifically, the overall consumer price index fell by 0.2 percent over the month, thanks to even lower gasoline prices than before. From one year ago, consumer prices were higher by only 1.0 percent.
What is strongly rising relates to housing costs. Rents are higher by 3.7 percent from one year ago. Home prices are rising even at a faster rate, but government statisticians do not include home prices into the inflation calculation. Rather they use something called “homeowners’ equivalent rent”, which is what the homeowner would pay to rent out their home. This measure is also rising solidly at 3.2 percent. Given that the housing costs carry the biggest weight in the calculation of the overall inflation, it is just inevitable for the broad inflation rate to go higher, especially once gasoline prices stop falling. Higher inflation will then trigger mortgage rates to move higher.
The cost-of-living-adjustment, say on social security checks, was zero in 2015, to reflect no price increase in 2014. But with the inflation expected to rise by 2 percent by the end of this year and possibly by 3 percent in 2017, the cost-of-living-adjustment will similarly be readjusted in the upcoming years.
As an aside, one sector has experienced turbo-charged price growth over the past 30 years. Which? Ask the parents with college kids.
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.