March 2012 Inflation Watch

An Eye on Prices March 22, 2012 Next Release: April 13, 2012

Inflation Watch
Inflation (price-level growth) is important for REALTORS because it can lead to shifts in interest rate policy by the Federal Open Market Committee (FOMC). Generally, the FOMC lowers interest rates to stimulate the economy. However, rates that are too low may lead to inflation. To combat inflation, the central bank increases interest rates but this policy may dampen economic growth. For example, the FOMC has extended its commitment to keeping rates low through late 2014 to help shore up economic activity, but this commitment comes with its own set of risks.

Inflation Watch
During the recent financial crisis, fears of deflation (price-level decline) were rampant. (Deflation caused a downward spiral of prices that destroyed the economy in the Great Depression.) With financial markets somewhat stable, some fear that inflation is around the corner. Stagflation, another unpleasant economic condition characterized by high unemployment and high inflation, is also a possibility. In stagflation, it is difficult for the central bank to raise interest rates to combat inflation due fear of further job market deterioration if demand is hurt by the increased interest rates.

March 2012 Highlights

A relaxation in monthly increases in the prices of food, household utilities, and medical services was not enough to offset other price acceleration such that the headline measure of consumer prices to was up 0.4 percent and producer prices were up 0.4 percent in the month as well. Prices are noticeably higher than a year agoby 2.9 percent for consumers and 3.3 percent for producers. Core consumer prices (those excluding food and energy) are just outside the bound of the target range of 1 to 2 percent. In part because prices are still within these bounds, the Fed has committed to continue the low-rate policy to late 2014 as noted in the January statement. Some consumer prices are advancing at a considerable rate. Necessities such as meats, food at home, transportation, and hospital services are areas of concern because of the year over year increase, but the February easing in monthly price growth is a good sign. The following tables summarize key figures while the graphs show increasing and decreasing prices for a few items.

Indicator

Consumer and Producer Price Change Overview Monthly Annual Concern Source and definition Change Change ?
BLS, Price change of consumer goods and services BLS, CPI less food and energy BLS, CPI housing component (primary residence) BLS, Price changes domestic producers receive for their output BLS, PPI less food and energy BLS, PPI crude / raw materials BLS, PPI BRES WSJ, Price per ounce of gold WSJ, Price per barrel of oil BLS, Trade-weighted index measures prices of imported goods & services Census, constant quality, new single family homes under construction 0.4% 0.1% 0.1% 0.4% 0.2% 0.4% 0.8% 5.0% 2.0% 0.4% -1.1% 2.9% 2.2% 1.8% 3.3% 3.0% 0.7% 4.4% 27.5% 14.1% 5.5% -0.8% Maybe Maybe No Maybe Maybe No Yes Yes Yes Yes No

Consumer Price Index (CPI) CPI Core CPI Housing (owners equivalent rent) Producer Price Index (PPI) PPI Core PPI Crude Materials PPI Residential Construction Gold West Texas Crude Oil Import Prices Construction Cost Index

Looking at the CPI in More Depth Indicator

Consumer Price Index (CPI) Lodging away from home Food at home Meats, poultry, fish and eggs Housing fuels and utilities Household furnishings & operations Transportation Medical care Hospital and related services Education Airline fare Personal Computers and peripheral equipment Apparel

Change from Change from Concern? previous month previous year

0.2% 0.2% 0.0% 0.2% -0.4% 0.1% 0.3% 0.3% 0.3% 0.3% -0.9% 0.0% 0.9% 2.9% 2.3% 5.3% 7.2% 1.9% 1.0% 5.0% 3.6% 5.3% 4.4% 1.8% -11.8% 4.7% Maybe No Yes Yes No No Yes Maybe Yes Maybe No No Maybe

CPI-U: All Items Less Food and Energy

% Change - Year to Year SA, 1982-84=100

CPI-U: All Items

% Change - Year to Year SA, 1982-84=100

-2
Source: Bureau of Labor Statistics

07

08

09

10

11

02/28/12

CPI-U: Owners' Equivalent Rent/Primary Residence

% Change - Year to Year SA, Dec-82=100

-1
Source: Bureau of Labor Statistics

02

03

04

05

06

07

08

09

10

02/28/12

11

PPI: Finished Goods

% Change - Year to Year SA, 1982=100

PPI: Finished Goods less Food and Energy

% Change - Year to Year SA, 1982=100

12

-4

-8
Source: Bureau of Labor Statistics

07

08

09

10

11

03/22/12

Cash Price: Gold Bullion, London Commodity Price, PM Fix

US$/troy Oz

1800

1600

1400

1200

1000

800

600
Source: Wall Street Journal

07

08

09

10

11

03/22/12

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

140

120

100

80

60

40

20
Source: Wall Street Journal

02

03

04

05

06

07

08

09

10

03/22/12

11

Import Price Index: All Imports

NSA, 2000=100

150

140

130

120

110

100

90 01 02 03 04 05 06 07 08 09 10
03/22/12

11

Houses under Construction: Fixed-Weighted Price Index

NSA, 2005=100

NAR Median Sales Price: Total Existing Homes, United States

$

110

240000

105

220000

100 200000 95 180000 90 160000

85

80
Sources: Census Bureau, National Association of Realtors

140000 02 03 04 05 06 07 08 09 10
03/22/12

11