Eye On Housing
The Bureau of Labor Statistics (BLS) released the Consumer Price Index (CPI) for November.
The Consumer Price Index (CPI) rose at a seasonally adjusted annual rate of 0.3% in November, slower than 2.4% in October. Meanwhile, excluding the volatile food and energy components, the “core” CPI rose at a seasonally adjusted annual rate of 2.2% in November following 2.5% in October.
In November, energy prices declined at a seasonally adjusted annual rate of 14.1%, after a 3.5% rise in October, accounting for most of the slowdown in the CPI inflation.
When measuring inflation, the Federal Reserve prefers the personal consumption expenditures (PCE) index, reported by the Bureau of Economic Analysis (BEA), rather than the CPI, “largely because the PCE index covers a wide range of household spending.”[1] A statistical analysis of the relationship between the core PCE inflation and the core CPI inflation shows that these two are highly correlated, making the core CPI inflation a reasonable predictor of the core PCE measure. A 2.2% annual growth rate of the core CPI inflation, coupled with the strength of labor market in November, indicate the economy is strong enough for the Fed to take action tomorrow, raising short-term interest rates and beginning the process of monetary policy normalization.
A “real” rent index is 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 been slowed in 2015, and rose at an annual rate of 0.5% in November, slower than 1.0% in October.
[1] http://www.federalreserve.gov/faqs/economy_14419.htm
Leave a Reply