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January 2012 Inflation Watch

An Eye on Prices January 20, 2012 Next Release: February 17, 2012

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 mid-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.

January 2012 Highlights
• December price growth moderated or declined for items such as lodging away from home, food prices, home fuels and utilities. • This caused the headline measure of consumer prices to be flat for a second month while producer prices declined. However, strong previous price growth means that prices are still noticeably higher than a 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 near the upper edge of the bound. • December’s continued relaxation in price growth means that the Fed will likely continue the low-rate policy to which it is committed through mid2013. Some even suspect additional easing by the Fed. • Some consumer prices are advancing at a considerable rate. Necessities such as food at home and hospital services are areas of concern. • The following tables summarize key figures while the charts show increasing and decreasing prices for a few items.

Indicator

Consumer and Producer Price Change Overview Monthly Annual Concern Source and definition Change Change ?
BLS, Price change of consumer goods and services BLS, CPI less food and energy BLS, CPI housing component (primary residence) BLS, Price changes domestic producers receive for their output BLS, PPI less food and energy BLS, PPI crude / raw materials BLS, PPI BRES WSJ, Price per ounce of gold WSJ, Price per barrel of oil BLS, Trade-weighted index measures prices of imported goods & services Census, constant quality, new single family homes under construction 0.0% 0.1% 0.2% -0.1% 0.3% -1.1% -0.1% -4.3% 1.4% -0.1% 0.1% 3.0% 2.2% 1.8% 4.8% 3.0% 6.4% 4.8% 19.0% 10.7% 8.5% 1.1% No Maybe No Diminishing Maybe Diminishing No Yes Yes Yes No

Consumer Price Index (CPI) CPI Core CPI Housing (owners’ equivalent rent) Producer Price Index (PPI) PPI Core PPI Crude Materials PPI Residential Construction Gold West Texas Crude Oil Import Prices Construction Cost Index

Looking at the CPI in More Depth Indicator
Consumer Price Index (CPI) Lodging away from home Food at home Meats, poultry, fish and eggs Housing fuels and utilities Household furnishings & operations Transportation Medical care Hospital and related services Education Airline fare Personal Computers and peripheral equipment Apparel

Change from Change from Concern? previous month previous year
0.0% -0.2% 0.3% 0.7% -0.2% 0.1% -0.7% 0.4% 0.5% 0.3% 0.2% -2.3% -0.1% 3.0% 2.0% 6.0% 7.9% 2.4% 1.0% 5.2% 3.5% 5.3% 4.6% 4.5% -12.5% 4.6% No No Yes Yes No No Diminishing Maybe Yes Maybe Maybe No No

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

6

4

2

0

-2
Source: Bureau of Labor Statistics

07

08

09

10

11

01/20/12

CPI-U: Owners' Equivalent Rent/Primary Residence
% Change - Year to Year SA, Dec-82=100

5

4

3

2

1

0

-1
Source: Bureau of Labor Statistics

02

03

04

05

06

07

08

09

10

01/20/12

11

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

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

12

8

4

0

-4

-8
Source: Bureau of Labor Statistics

07

08

09

10

11

01/20/12

Cash Price: Gold Bullion, London Commodity Price, PM Fix
US$/troy Oz

1800

1600

1400

1200

1000

800

600
Source: Wall Street Journal

07

08

09

10

11

01/20/12

Domestic Spot Oil Price: West Texas Intermediate
$/Barrel

150

125

100

75

50

25

0
Source: Wall Street Journal

02

03

04

05

06

07

08

09

10

01/20/12

11

Import Price Index: All Imports
NSA, 2000=100

150

140

130

120

110

100

90 01 02 03 04 05 06 07 08 09 10
01/20/12

11

Houses under Construction: Fixed-Weighted Price Index
NSA, 2005=100

NAR Median Sales Price: Total Existing Homes, United States
$

110

240000

105

220000

100 200000 95 180000 90 160000

85

80
Sources: Census Bureau, National Association of Realtors

140000 02 03 04 05 06 07 08 09 10
01/20/12

11