May 2011 Inflation Watch

An Eye on PricesMay 13, 2011

Next Release: June 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, lower mortgage rates could bring home buyers into the market and create jobs while higher mortgage rates caused by inflation or central bank action could reduce demand among home buyers.

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 now 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.

May 2011 Highlights• Increases in producer prices continue to spill

into consumer prices, especially in energy• A weaker dollar may boost exports, but it

translates into higher import prices• Headline consumer prices have increased far

too quickly in the month for the fifth month in a row; only apparel, computers, and household furnishings have seen price declines recently

• In addition to pressuring the FOMC to raise interest rates, higher prices put stress on consumer budgets

• One piece of good news is that consumers expect gas prices to stop rising

Indicator Source and definitionMonthly Change

Annual Change

Concern ?

Consumer Price Index (CPI)

BLS, Price change of consumer goods and services

0.4% 3.2% Maybe

CPI Core BLS, CPI less food and energy 0.2% 1.3% NoCPI Housing (owners’ equivalent rent)

BLS, CPI housing component (primary residence)

0.1% 0.9% No

Producer Price Index (PPI)

BLS, Price changes domestic producers receive for their output

0.8% 6.8% Maybe

PPI Core BLS, PPI less food and energy 0.3% 2.1% Maybe

PPI Crude Materials BLS, PPI crude / raw materials 4.0% 23.7% YesPPI Residential Construction

BLS, PPI BRES 1.1% 5.8% Maybe

Gold WSJ, Price per ounce of gold 3.5% 28.3% YesWest Texas Crude Oil WSJ, Price per barrel of oil 6.9% 30.3% Yes

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

2.2% 11.1% Yes

Construction Cost Index

Census, constant quality, new single family homes under construction

-0.1% 0.0% No

Consumer and Producer Price Change Overview

IndicatorChange from

previous monthChange from previous year

Concern?

Consumer Price Index (CPI) 0.4% 3.2% MaybeLodging away from home 0.0% 1.7% NoFood at home 0.5% 3.9% MaybeMeats, poultry, fish and eggs 1.1% 7.6% YesHousing fuels and utilities 0.6% 2.6% MaybeHousehold furnishings & operations

0.2% -0.9% No

Transportation 1.4% 11.8% YesMedical care 0.4% 2.9% MaybeHospital and related services 0.6% 5.4% YesEducation 0.3% 3.8% MaybeAirline fare 0.3% 12.1% YesPersonal Computers and peripheral equipment

-0.1% -8.0% No

Apparel 0.2% 0.1% No

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

1009080706Source: Bureau of Labor Statistics 05/13/11

6

4

2

0

-2

CPI-U: Owners' Equivalent Rent/Primary Residence

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

10090807060504030201Source: Bureau of Labor Statistics 05/13/11

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

1009080706Source: Bureau of Labor Statistics 05/13/11

12

8

4

0

-4

-8

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

US$/troy Oz

1009080706Source: Wall Street Journal 05/13/11

1500

1250

1000

750

500

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

10090807060504030201Source: Wall Street Journal 05/13/11

150

125

100

75

50

25

0

Import Price Index: All Imports

NSA, 2000=100

100908070605040302010005/13/11

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$

10090807060504030201Sources: Census Bureau, National Association of Realtors 05/13/11

112.5

105.0

97.5

90.0

82.5

75.0

240000

220000

200000

180000

160000

140000