In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses CPI and the outlook in inflation.
- After a virtually non-existent rise in consumer price index (CPI) in the recent years, inflation looks to kick higher starting in 2015.
- Inflation in January remained tame, up 1.6 percent over the past year. But the subcomponents on housing related prices have risen close to 3 percent. Rents rose at a 2.9 percent clip, while the mysterious and murky homeowner equivalence rent increased by 2.5 percent, the highest pace in nearly 6 years. The latter is hypothetical and not actual market exchange data of what homeowners would receive in rent if their home was rented out.
- Both rent and homeowner equivalency rent are bound to increase further since apartment vacancy rates, and the number of homes available for sale/rent, have been falling. These housing components carry the biggest weight in CPI calculations and therefore will exert upward pressure on the broad inflation figure.
- Energy prices have also begun to inch higher. Though gasoline prices are not necessarily moving higher from already new normal levels, natural gas prices are and could even break higher if the situation in Ukraine/Russia does not simmer down.
- The Federal Reserve prefers the inflation rate to be at between 1 to 2 percent. It considers 3 percent as the red line not to cross. However, the line could easily be crossed next year, possibly prompting a quicker tightening in monetary policy and notably higher interest rates.
- After increasing by only 1.4 percent in 2013, CPI is expected to rise by 2.5 percent this year and then move even higher to 4 percent next year for the reasons state above. Rising inflation also means higher interest rates. However, the possibility of a double-digit inflation rate, as occurred during the 1970s, is zero.
- The purpose of measuring inflation is to check on our standard of living, to see how much of our earnings are getting eaten away by higher prices. The daylight savings time adjustment means we lost one hour of potential work while needing to pay fixed monthly expenses like rent. This we know reverses in autumn. But one time in England, the country decided to switch to the more accurate Pope Gregorian calendar time like the rest of Europe and be done with the clunky Julius Caesar calendar. This adjustment meant a sudden advancement of 12 days at the flip of a finger from September 2, 1752 to September 14, 1752. Laborers lost work days, while their monthly rent was quickly coming due. Riots ensued.
In each Economic Update, the Research staff analyzes recently released economic indicators and addresses what these indicators mean for REALTORS® and their clients. Today’s update discusses employment.
- The economy added 175,000 net new jobs in February, thereby bringing total in the past 12 months to 2.2 million. Job creations provide the foundation for a new set of homebuyers and for increased demand for commercial real estate.
- The unemployment rate moved up one notch to 6.7 percent. At its worst a few years ago, the unemployment rate was 10 percent. Though this is progress, there is a bit of murkiness in the unemployment figure because of those who dropped out of the labor force and are not counted. A cleaner measure is the employment rate: the proportion of the working age population with jobs. The employment rate has remained stuck at 58.8 percent, about the same level for the past five consecutive years. Before the recession hit, the employment rate had been about 63 percent. In short, there has been an improvement in the unemployment rate, but absolutely no improvement in the employment rate.
- Construction related jobs have increased by 152,000 in the past year. However, the degree of recovery is very weak considering the massive job cuts that occurred in this sector. Moreover, there appears to be sizable pent-up hiring demand in construction since home building activity has increased by 50 percent from the low of few years ago while the residential construction jobs have increased by only 12 percent.
- The average hourly earnings are beginning to move up. It rose to $20.50 per hour for nonsupervisory jobs. That is up 2.5 percent over the year and the fastest gain since 2010.
- The number of part-time workers who wish to have full-time jobs remains elevated. There are 7 million Americans in this status.
- A total of 91 million Americans are not in the labor force. Retirees, spouses looking after kids, college students, and the disabled are among those not in the labor force. Because of rising population, this figure should also rise over time. However, the pace of increase of the people not working in recent years has been higher than normal.
- Americans are defined not by birth, but by what they can achieve. It is said that common sense and hard work are all one needs to succeed in America. For example, an unschooled drifter named Benjamin Franklin ended up inventing many new things to improve the lives of ordinary people because he was out there working every single day. Not hindered by his parent’s illiteracy, Abraham Lincoln learned to read and write on his own without formal schooling in another example. Andrew Carnegie delivered newspapers in Pittsburgh as a teenager to get ahead and eventually became one of the wealthiest, after gladly leaving the old, stuffy world of Downton Abbey. Harriet Tubman risked her life many times to re-enter slave states in order to help more people gain freedom. Her words: “Even when you are tired, you keep going.” Fewer Americans today appear to live by the same enterprising spirit.