|
Inflation
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|
|
|
 |
| MOST RECENT STATISTIC: |
1.2% |
|
|
| GRADE: |
A+ |
| PERIOD COVERED: |
July 2010 |
| Date Released: |
08/13/10 |
|
|
|
| Next Released: |
09/17/10 |
|
|
|
|
|
|
07/10 |
06/10 |
05/10 |
07/09 |
07/08 |
|
| 1-Year CPI % Change |
1.2% |
1.1% |
2.0% |
(2.1%) |
5.6% |
| - less Food &
Energy |
0.9% |
0.9% |
0.9% |
1.5% |
2.5% |
|
|
|
|
|
|
| GDP Price Deflator |
- |
1.8% |
- |
1.9%
|
1.7%
|
| Empl Cost Index |
- |
1.8% |
-
|
2.1% |
3.3% |
|
| Source:
Bureau of Labor Statistics: Bureau of Economic Analysis |
Analysis
for the Housing Market
By: Ken Lee
The consumer price index increased in July due to higher prices in apparel, transportation, and energy. However, inflation on the consumer level continues to be well-contained and below the historical rate. The consumer price index remained relatively unchanged from the previous month on a non-seasonally adjusted but rose 0.3% from June levels on a seasonally-adjusted basis.
The core-CPI, which economists watch as a closer indicator of inflation because it excludes often volatile food and energy prices, remained virtually flat for the fourth straight month in July on a non-seasonally adjusted basis and recorded a 0.1% increase from the previous month on a seasonally-adjusted basis.
On an unadjusted basis, headline CPI increased just 1.2% from its year ago levels while core CPI increased 0.9% year-over-year in July. This was the tamest annual increase in core consumer prices that we have on record starting from 1980. Weaker core consumer prices have ignited concerns of deflation if slower economic growth and weaker employment trends persist.
In July, energy prices increased 2.6% which attributed to the increase in headline inflation. Food and beverage prices remained flat from the previous month. Transportation costs rose 1.3% in July while apparel costs increased 0.6%. Housing costs increased 0.1% from June while education and communication costs increased 0.2%. Medical care and recreation prices both posted a 0.1% drop.
Employment costs increased 0.5% from April through June 2010, which was lower than the 0.6% increase recorded during the previous quarter. The employment cost index increased 1.8% during the past twelve months. Employment costs have steadily risen in the past few quarters. The 1.8% increase in the second quarter is the highest for any quarter since the second quarter of last year. However, employment costs remained well-contained and below its historical average.
Definitions
and Importance for the Housing Market
By: Eric Alanis
The most widely used measure of inflation is the Consumer Price Index (CPI), which is a measure of the average change over time in the prices paid by urban consumers for a "market basket" of consumer goods and services. The CPI is sometimes viewed as an indicator of the effectiveness of government economic policy, but mostly provides information about price changes in the Nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to make economic decisions. The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. The CPI-U over the last 12 months, unadjusted for seasonality is the measure we report. It represents all goods and services purchased for consumption and covers approximately 87% of the population. The change in prices is measured for eight major groups: food, housing, transportation, apparel, medical care, recreation, education and communication, and other goods and services. In our opinion, the core rate, which excludes volatile food and energy prices, is the best measure.
The Implicit GDP Price Deflator (IPD) is another excellent indicator of inflation. It is a nationwide indicator of the average increase in prices for all domestic personal consumption (not just consumer consumption), and is derived by dividing current price estimates of the GDP at purchase values (market prices) by constant price estimates. The CPI and IPD differ in three major ways. The CPI measures price changes for the same "market basket" of goods and services over time and the IPD measures average price changes for all domestic personal consumption on a national level. Second, the CPI is not revised after initial release, and the IPD does undergo revisions of initial figures. Finally, the IPD tends to measure minor price changes better than the CPI does. The IPD is reported quarterly. Therefore, historical numbers shown above are for the appropriate quarter.
The Employment Cost Index is a closely monitored indicator of inflation. It measures changes in compensation costs, which include wages, salaries and employee benefits. These figures actually understate the facts because they exclude trendier forms of compensation like hiring bonuses and stock options.
Inflation, and anticipated inflation, directly affects mortgage rates. Because many housing lenders these days sell large pools of mortgages to investors (known as mortgage-backed securities), one of the prime determinants of mortgage rates is the rate that investors require when they buy pools of mortgages from lenders. Because mortgage investors desire a certain premium over inflation, rising inflation (and even the expectation of rising inflation) will increase mortgage rates. When mortgage rates increase, a number of buyers are prevented from qualifying to buy the home they desire. Rising mortgage rates also ultimately inhibit home price appreciation because the ultimate determinant of home prices is what buyers can afford.
Our overall reported inflation is based on a straight average of all four inflation variables. While this calculation has no statistical relevance, it is meant to help the reader interpret all four variables.
For more information on the CPI and inflation, go to: http://www.bls.gov/cpi/
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