April 2011 Inflation Watch

An Eye on Prices

April 15, 2011

Next Release: May 13, 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.

April 2011 Highlights

• Increases in producer prices are beginning to creep

into consumer prices, especially in energy prices

• Headline consumer prices increased far too quickly

in the month; only apparel, computers, and

household furnishings have seen price declines

• A survey of industry economists finds rising prices

and the expectation of further price and cost

increases

Indicator Source and definitionMonthly

Change

Annual

Change

Concern

?Consumer Price Index

(CPI)

BLS, Price change of consumer goods

and services0.5% 2.7% Maybe

CPI Core BLS, CPI less food and energy 0.1% 1.2% No

CPI Housing (owners’

equivalent rent)

BLS, CPI housing component

(primary residence)0.1% 0.8% No

Producer Price Index

(PPI)

BLS, Price changes domestic

producers receive for their output0.7% 5.8% Maybe

PPI Core BLS, PPI less food and energy 0.3% 1.9% Maybe

PPI Crude Materials BLS, PPI crude / raw materials -0.5% 16.4% Yes

PPI Residential

ConstructionBLS, PPI BRES 1.6% 5.7% Maybe

Gold WSJ, Price per ounce of gold 3.7% 27.2% Yes

West Texas Crude Oil WSJ, Price per barrel of oil 14.9% 26.7% Yes

Import PricesBLS, Trade-weighted index measures

prices of imported goods & services2.7% 9.7% Yes

Construction Cost

Index

Census, constant quality, new single

family homes under construction-0.3% -0.5% No

Consumer and Producer Price Change Overview

IndicatorChange from

previous month

Change from

previous yearConcern?

Consumer Price Index (CPI) 0.5% 2.7% Maybe

Lodging away from home 0.8% 2.6% No

Food at home 1.1% 3.6% No

Meats, poultry, fish and eggs 1.1% 7.9% Yes

Housing fuels and utilities 0.6% 2.1% No

Household furnishings &

operations-0.1% -1.6% No

Transportation 2.2% 9.8% Yes

Medical care 0.2% 2.7% Maybe

Hospital and related services 0.2% 5.1% Yes

Education 0.3% 4.0% Maybe

Airline fare 1.9% 13.7% Yes

Personal Computers and

peripheral equipment-0.9% -8.1% No

Apparel -0.5% -0.6% 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 04/15/11

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 04/15/11

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 04/15/11

12

8

4

0

-4

-8

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

US$/troy Oz

1009080706Source: Wall Street Journal 04/15/11

1500

1250

1000

750

500

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

10090807060504030201Source: Wall Street Journal 04/18/11

150

125

100

75

50

25

0

Import Price Index: All Imports

NSA, 2000=100

100908070605040302010004/18/11

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 04/15/11

112.5

105.0

97.5

90.0

82.5

75.0

240000

220000

200000

180000

160000

140000