October 2011 Inflation Watch

An Eye on PricesOctober 25, 2011

Next Release: November 16, 2011

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 committed to keeping rates low through 2013 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.

October 2011 Highlights• While economic uncertainty moderated price growth in

commodities such as oil in August and September, many consumer prices and other commodities continue to advance on a monthly basis. Also, in spite of a second month of weakness, year over year inflation is still high among commodities.

• Among consumer goods, only prices for computers and peripheral equipment have declined over the year. Lodging away from home and apparel saw price declines in September though they are still up compared to one year ago.

• While core (those excluding food and energy) and headline consumer prices are within the bounds of the target range: 1 to 2 and 2 to 4 percent respectively, they are approaching the upper edge of the bound.

• Some consumer prices are advancing at a considerable rate. Necessities such as transportation, food at home, and housing fuels and utilities are areas of concern.

Indicator Source and definitionMonthly Change

Annual Change

Concern ?

Consumer Price Index (CPI)

BLS, Price change of consumer goods and services

0.3% 3.9% Yes

CPI Core BLS, CPI less food and energy 0.1% 2.0% MaybeCPI Housing (owners’ equivalent rent)

BLS, CPI housing component (primary residence)

0.1% 1.5% No

Producer Price Index (PPI)

BLS, Price changes domestic producers receive for their output

0.8% 6.9% Yes

PPI Core BLS, PPI less food and energy 0.2% 2.5% MaybePPI Crude Materials BLS, PPI crude / raw materials 2.8% 20.9% YesPPI Residential Construction

BLS, PPI BRES 0.0% 6.7% Maybe

Gold WSJ, Price per ounce of gold 1.2% 40.9% YesWest Texas Crude Oil WSJ, Price per barrel of oil -0.8% 13.7% Maybe

Import PricesBLS, Trade-weighted index measures prices of imported goods & services

0.3% 13.4% Yes

Construction Cost Index

Census, constant quality, new single family homes under construction

0.4% 1.0% No

Consumer and Producer Price Change Overview

IndicatorChange from

previous monthChange from previous year

Concern?

Consumer Price Index (CPI) 0.3% 3.9% YesLodging away from home -0.7% 3.3% MaybeFood at home 0.6% 6.3% YesMeats, poultry, fish and eggs 0.4% 7.5% YesHousing fuels and utilities 0.7% 4.0% YesHousehold furnishings & operations

0.0% 0.4% No

Transportation 1.0% 11.8% YesMedical care 0.2% 2.8% MaybeHospital and related services 0.1% 4.9% MaybeEducation 0.2% 4.4% MaybeAirline fare 1.0% 10.1% YesPersonal Computers and peripheral equipment

-1.4% -12.9% No

Apparel -1.1% 3.5% Maybe

Looking at the CPI in More Depth

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

1110090807Source: Bureau of Labor Statistics 10/25/11

6

4

2

0

-2

CPI-U: Owners' Equivalent Rent/Primary Residence

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

11100908070605040302Source: Bureau of Labor Statistics 10/25/11

5

4

3

2

1

0

-1

PPI: Finished Goods% Change - Year to Year SA, 1982=100

PPI: Finished Goods less Food and Energy% Change - Year to Year SA, 1982=100

1110090807Source: Bureau of Labor Statistics 10/25/11

12

8

4

0

-4

-8

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

US$/troy Oz

1110090807Source: Wall Street Journal 10/25/11

2000

1750

1500

1250

1000

750

500

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

11100908070605040302Source: Wall Street Journal 10/25/11

150

125

100

75

50

25

0

Import Price Index: All Imports

NSA, 2000=100

111009080706050403020110/25/11

150

140

130

120

110

100

90

Houses under Construction: Fixed-Weighted Price IndexNSA, 2005=100

NAR Median Sales Price: Total Existing Homes, United States$

11100908070605040302Sources: Census Bureau, National Association of Realtors 10/25/11

110

105

100

95

90

85

80

240000

220000

200000

180000

160000

140000