- Consumer prices (CPI) fell 0.2 percent in August as declines in gasoline prices offset increases in food and shelter prices. Core inflation, a measure that excludes volatile food and energy prices, was flat for the month. On a year-over-year basis, prices rose 1.7 percent for all items and core items.
- This rate of inflation is just below the Federal Reserve’s 2 percent inflation target [1] and the information comes as the FOMC meeting wraps up today. A statement on any adjustments to monetary policy as well as economic projections and a press conference with Chair Yellen is scheduled for this afternoon. Expect a continuation of the current taper schedule (a further $10 billion reduction in asset purchases) and perhaps some changes in the policy statement to indicate that the Fed may begin rate increases in the first half of 2015 if the economy continues to improve as expected.
- While lower overall prices may lessen pressure on the FOMC to begin tightening, prices of certain items are rising faster than the 2 percent target.
- For example, rent of primary residences—actual market rents paid by individuals who do not own the home they live in (pictured below)—rose by 3.2 percent from a year ago in August. This was the 5th month of growth above 3 percent for this rent.
- When rents are rising, it becomes more attractive to own a home. Because the bulk of home ownership costs for someone with a 30-year fixed rate mortgage are fixed, even if rents are initially cheaper, potential buyers can expect rent costs to catch up to ownership costs.
- Owner’s equivalent rent of residences (OER), a measure to approximate price change for owner-occupied housing, rose 2.7 percent in August [2] . This was the 9th consecutive month of growth at or above 2.5 percent for OER. Together, the two rent components contribute more than 30 percent to the overall CPI.
- Real estate agents may be happy about the energy offset. In spite of increases in rents, energy prices were lower, especially Gasoline prices which are down 2.8 percent from a year ago. The 2014 Member Profile shows that the typical REALTOR® spent $1,860 on expenses for the business use of a vehicle in 2013, an amount equivalent to 28 percent of the typical REALTOR® total real estate expenses in the same time period.
[1] While the Fed does not target this specific measure, the factors driving the Fed’s preferred measure of inflation are the same.
[2] Owners do not actually pay the increased costs. OER is intended to estimate the change in the amount of money that an owner could rent their home for if they did not live in the home. This estimate is included as a factor in the CPI so as to lessen the effect of variation in the home ownership rate on the price series.