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November 2011 Inflation Watch
An Eye on PricesNovember 18, 2011
Next Release: December 17, 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.
November 2011 Highlights• Price growth in the month of October moderated or even declined
in a variety of headline measures such as the consumer price index, gold prices, and many producer price indexes. However, strong price growth in previous months means that prices are still noticeably higher than one year ago.
• Among consumer goods, only prices for computers and peripheral equipment have declined over the year. The total CPI along with lodging away from home, housing fuels and utilities, transportation, and airline fares saw price declines in October 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. October’s relaxation in price growth means that the Fed will likely continue the low-rate policy to which it is committed through mid-2013.
• 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
-0.1% 3.5% Maybe
CPI Core BLS, CPI less food and energy 0.1% 2.1% MaybeCPI Housing (owners’ equivalent rent)
BLS, CPI housing component (primary residence)
0.2% 1.6% No
Producer Price Index (PPI)
BLS, Price changes domestic producers receive for their output
-0.3% 5.9% Maybe
PPI Core BLS, PPI less food and energy 0.0% 2.8% MaybePPI Crude Materials BLS, PPI crude / raw materials -2.5% 12.6% YesPPI Residential Construction
BLS, PPI BRES -0.4% 5.9% Maybe
Gold WSJ, Price per ounce of gold -8.2% 23.2% YesWest Texas Crude Oil WSJ, Price per barrel of oil 0.9% 5.5% Yes
Import PricesBLS, Trade-weighted index measures prices of imported goods & services
-0.6% 11.0% Yes
Construction Cost Index
Census, constant quality, new single family homes under construction
0.2% 1.8% No
Consumer and Producer Price Change Overview
IndicatorChange from
previous monthChange from previous year
Concern?
Consumer Price Index (CPI) -0.1% 3.5% MaybeLodging away from home -1.7% 2.2% MaybeFood at home 0.1% 6.2% YesMeats, poultry, fish and eggs 0.5% 7.4% YesHousing fuels and utilities -0.2% 3.5% YesHousehold furnishings & operations
0.1% 0.6% No
Transportation -1.1% 9.2% YesMedical care 0.5% 3.1% YesHospital and related services 0.6% 4.9% YesEducation 0.4% 4.7% YesAirline fare -0.1% 9.6% YesPersonal Computers and peripheral equipment
-0.4% -13.1% No
Apparel 0.4% 4.2% Yes
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 11/16/11
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 11/16/11
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 11/16/11
12
8
4
0
-4
-8
Cash Price: Gold Bullion, London Commodity Price, PM Fix
US$/troy Oz
1110090807Source: Wall Street Journal 11/16/11
2000
1750
1500
1250
1000
750
500
Domestic Spot Oil Price: West Texas Intermediate
$/Barrel
11100908070605040302Source: Wall Street Journal 11/16/11
150
125
100
75
50
25
0
Import Price Index: All Imports
NSA, 2000=100
111009080706050403020111/16/11
150
140
130
120
110
100
90
Houses under Construction: Fixed-Weighted Price IndexNSA, 2005=100
NAR Median Sales Price: Total Existing Homes, United States$
11100908070605040302Sources: Census Bureau, National Association of Realtors 11/16/11
110
105
100
95
90
85
80
240000
220000
200000
180000
160000
140000