July 2011 Inflation Watch

An Eye on PricesJuly 26, 2011

Next Release: August 18, 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.

July 2011 Highlights

• Monthly price change from June to July was generally better, but in year over year inflation continues to run high due to previous increases.

• While monthly price increases had been seen among commodities earlier in the year, these prices have declined recently while service-sector prices are increasing on a monthly basis

• Headline consumer price growth was generally stable in July, but necessities such as education, hospital costs, and food at home 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

-0.2% 3.6% Maybe

CPI Core BLS, CPI less food and energy 0.3% 1.6% MaybeCPI Housing (owners’ equivalent rent)

BLS, CPI housing component (primary residence)

0.2% 1.0% No

Producer Price Index (PPI)

BLS, Price changes domestic producers receive for their output

-0.4% 7.0% Maybe

PPI Core BLS, PPI less food and energy 0.3% 2.4% Maybe

PPI Crude Materials BLS, PPI crude / raw materials -0.6% 26.2% YesPPI Residential Construction

BLS, PPI BRES 0.0% 6.7% Maybe

Gold WSJ, Price per ounce of gold 0.5% 23.7% YesWest Texas Crude Oil WSJ, Price per barrel of oil -5.0% 27.8% Maybe

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

-0.5% 13.6% Maybe

Construction Cost Index

Census, constant quality, new single family homes under construction

-0.2% 1.6% No

Consumer and Producer Price Change Overview

IndicatorChange from

previous monthChange from previous year

Concern?

Consumer Price Index (CPI) -0.2% 3.6% YesLodging away from home 3.0% 3.7% MaybeFood at home 0.2% 4.7% YesMeats, poultry, fish and eggs -0.4% 7.2% YesHousing fuels and utilities -0.8% 3.3% MaybeHousehold furnishings & operations

0.0% -0.4% No

Transportation -1.9% 12.6% YesMedical care 0.2% 2.9% NoHospital and related services 0.5% 5.5% YesEducation 0.3% 3.8% MaybeAirline fare -3.0% 6.7% NoPersonal Computers and peripheral equipment

-2.5% -8.7% No

Apparel 1.4% 1.9% 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 07/26/11

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 07/26/11

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 07/26/11

12

8

4

0

-4

-8

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

US$/troy Oz

1110090807Source: Wall Street Journal 07/26/11

1600

1400

1200

1000

800

600

400

Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

11100908070605040302Source: Wall Street Journal 07/26/11

150

125

100

75

50

25

0

Import Price Index: All Imports

NSA, 2000=100

111009080706050403020107/26/11

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 07/26/11

112.5

105.0

97.5

90.0

82.5

75.0

240000

220000

200000

180000

160000

140000