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June 2012 Inflation Watch

An Eye on Prices

June 15, 2012

Next Release: July 18, 2012

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Inflation Watch

Inflation (price-level growth) is important forREALTORS 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 extended its commitment tokeeping rates low through late 2014 to help shore up

economic activity, but this commitment comes with its own

set of risks.

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Inflation Watch

During the recent financial crisis, fears of deflation(price-level decline) were rampant. (Deflation caused adownward spiral of prices that destroyed the economy inthe Great Depression.)

With financial markets somewhat stable, some fear thatinflation is around the corner. Stagflation, anotherunpleasant economic condition characterized by highunemployment 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 jobmarket deterioration if demand is hurt by the increasedinterest rates.

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June 2012 Highlights

The drop off in oil prices coupled with the decline in prices of many consumerstaples brought the headline CPI down in May by 0.3 percent. Consumer pricesremain 1.7 percent higher than one year ago.

For producers, prices followed a similar pattern; they were down 1 percent in Mayand up 0.7 percent from May 1 year ago.

Core consumer prices (those excluding food and energy) are just outside the bound

of the target range of 1 to 2 percent. Core producer prices are also experiencinghigher growth than headline prices.

In part because prices are still close to the target range, the Fed has committed tocontinue the low-rate policy to late 2014 as noted in the January statement.

While slower price growth in headline measures will help the Fed keep its policycommitment, pressure from rising core prices which include services like rents,hospitals, and education may eventually push the Fed to raise rates before many

analysts expect them to. The following tables summarize key figures while the graphs show increasing and

decreasing prices for a few items.

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Indicator Source and definitionMonthly

Change

Annual

Change

Concern

?

Consumer Price Index(CPI)

BLS, Price change of consumer goodsand services

-0.3% 1.7% No

CPI Core BLS, CPI less food and energy 0.2% 2.3% Maybe

CPI Housing (owners

equivalent rent)

BLS, CPI housing component

(primary residence)0.1% 2.1% No

Producer Price Index

(PPI)

BLS, Price changes domestic

producers receive for their output -1.0% 0.7% No

PPI Core BLS, PPI less food and energy 0.2% 2.7% No

PPI Crude Materials BLS, PPI crude / raw materials -3.2% -7.7% Maybe

PPI Residential

ConstructionBLS, PPI BRES -0.3% 1.9% No

Gold WSJ, Price per ounce of gold -3.3% 5.1% MaybeWest Texas Crude Oil WSJ, Price per barrel of oil -8.4% -6.5% No

Import PricesBLS, Trade-weighted index measures

prices of imported goods & services-1.0% -0.3% No

Construction Cost

Index

Census, constant quality, new single

family homes under construction

0.5% -0.7% No

Consumer and Producer Price Change Overview

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IndicatorChange from

previous month

Change from

previous yearConcern?

Consumer Price Index (CPI) -0.3% 1.7% No

Lodging away from home 1.5% 4.1% Yes

Food at home -0.1% 2.7% Maybe

Meats, poultry, fish and eggs -0.5% 2.7% Maybe

Housing fuels and utilities -0.7% -1.6% NoHousehold furnishings &

operations-0.3% 0.6% No

Transportation -2.1% 0.2% No

Medical care 0.4% 3.6% Maybe

Hospital and related services 0.6% 4.7% YesEducation 0.4% 4.3% Yes

Airline fare 1.0% 3.2% Maybe

Personal Computers and

peripheral equipment0.0% -10.6% No

Apparel 0.4% 4.4% Yes

Looking at the CPI in More Depth

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CPI-U : All Items Less Foo d 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 06/15/12

6

4

2

0

-2

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CPI-U: Owners' Equivalent Rent/Primary Residence

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

11100908070605040302Source: Bureau of Labor Statistics 06/15/12

5

4

3

2

1

0

-1

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PPI: Finished Goods% Change - Year to Year SA, 1982=100

PPI: Finished Goods less Foo d and Energy% Change - Year to Year SA, 1982=100

1110090807Source: Bureau of Labor Statistics 06/15/12

12

8

4

0

-4

-8

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

US$/troy Oz

1110090807Source: Wall Street Journal 06/15/12

1800

1600

1400

1200

1000

800

600

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Domestic Spot Oil Price: West Texas Intermediate

$/Barrel

11100908070605040302Source: Wall Street Journal 06/15/12

140

120

100

80

60

40

20

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Import Price Index: All Imports

NSA, 2000=100

111009080706050403020106/15/12

150

140

130

120

110

100

90

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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 06/15/12

110

105

100

95

90

85

80

240000

220000

200000

180000

160000

140000