Slow Rise in Consumer Prices in July

The Bureau of Labor Statistics (BLS) reported consumer prices increased in July. The Consumer Price Index (CPI) rose at a seasonally adjusted annual rate of 1.6%, slower than 3.9% in June. Excluding the volatile food and energy components, the “core” CPI rose at a seasonally adjusted annual rate of 1.6% in July. Energy prices were stabilized and rose at a seasonally adjusted annual rate of 0.7%, down from 22.9% in June.

The CPI is the inflation measure most widely covered by the media, but the measure the Federal Reserve focuses on for setting monetary policy is the price index for personal consumption expenditures (PCE), used by the Bureau of Economic Analysis (BEA) in the National Income and Product (NIPA) accounts. This is the index for the Fed’s 2.0% inflation target. Excluding the food and energy components, the core (PCE) and the core CPI show very similar movements. Given this relationship the core CPI may provide an early indication of what the core PCE will show. The core CPI dipped in July from June but has been trending toward the Fed’s 2.0% target over the last 12 months, averaging 1.8% over the period.

Figure 1_July

A “real” rent index can be constructed to indicate whether the inflation in rents is faster or slower than overall inflation. It provides insight into the supply and demand conditions for rental housing. When inflation in rents is rising faster (slower) than overall inflation, the real rent index rises (declines). The real rent index is calculated by dividing the price index for rent by the core CPI (to exclude the volatile energy component).

After declines during the recession, inflation in real rents accelerated from 2012 to 2014, a period of strong recovery in the multifamily sector, reaching a peak average annual rate of 1.7% in 2014. Real rent inflation has slowed in 2015, averaging 1.5% from January to July.

Figure 2_July


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