August 2011 Inflation Watch

An Eye on PricesAugust 19, 2011

Next Release: September 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, recently, the FOMC 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.

August 2011 Highlights

• Price change from July to August generally picked up, and year over year inflation continues to run high due to previous increases.

• One bright spot was in crude materials where prices declined, though increases earlier in the year mean that year over year inflation is still high. Among consumer goods, only household furnishing and computers and peripheral equipment have price declines.

• 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, other consumer prices are advancing at a considerable rate. Necessities such as transportation, food at home, and hospital costs are areas of concern; the prices of lodging away from home and apparel also grew at a rate higher than usual this month.

Indicator Source and definitionMonthly Change

Annual Change

Concern ?

Consumer Price Index (CPI)

BLS, Price change of consumer goods and services

0.5% 3.6% Maybe

CPI Core BLS, CPI less food and energy 0.2% 1.8% NoCPI Housing (owners’ equivalent rent)

BLS, CPI housing component (primary residence)

0.3% 1.2% Maybe

Producer Price Index (PPI)

BLS, Price changes domestic producers receive for their output

0.2% 7.2% Maybe

PPI Core BLS, PPI less food and energy 0.4% 2.5% NoPPI Crude Materials BLS, PPI crude / raw materials -1.2% 22.6% YesPPI Residential Construction

BLS, PPI BRES 0.3% 7.3% Maybe

Gold WSJ, Price per ounce of gold 2.8% 31.8% YesWest Texas Crude Oil WSJ, Price per barrel of oil 0.9% 27.3% Yes

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

0.3% 14.0% Yes

Construction Cost Index

Census, constant quality, new single family homes under construction

-0.3% 1.0% No

Consumer and Producer Price Change Overview

IndicatorChange from

previous monthChange from previous year

Concern?

Consumer Price Index (CPI) 0.5% 3.6% YesLodging away from home 0.9% 4.7% YesFood at home 0.6% 5.4% YesMeats, poultry, fish and eggs 0.5% 7.4% YesHousing fuels and utilities 0.2% 3.2% MaybeHousehold furnishings & operations

0.0% -0.2% No

Transportation 1.5% 12.0% YesMedical care 0.2% 3.2% MaybeHospital and related services 0.4% 6.2% YesEducation 0.7% 4.0% YesAirline fare 0.1% 7.6% NoPersonal Computers and peripheral equipment

-0.5% -9.4% No

Apparel 1.2% 3.1% 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 08/19/11

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 08/19/11

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 08/19/11

12

8

4

0

-4

-8

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

US$/troy Oz

1110090807Source: Wall Street Journal 08/19/11

1600

1400

1200

1000

800

600

400

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

11100908070605040302Source: Wall Street Journal 08/19/11

150

125

100

75

50

25

0

Import Price Index: All Imports

NSA, 2000=100

111009080706050403020108/19/11

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 08/19/11

110

105

100

95

90

85

80

240000

220000

200000

180000

160000

140000