Key Takeaways:

  • January inflation is 7.5 percent above a year ago, with rate increases accelerating
  • Inflation is now the highest in 40 years
  • Price rises for goods exceed 12 percent over last year, while services, which always lag, are still nearly 5 percent higher
  • Although Housing Industry goods and services inflation, at 5.7 percent, is below overall levels, it has shown a steady increase over the past year

By Manuel Gutierrez, Consulting Economist to NKBA

 

The consumer price index rose again in January, the fifth consecutive monthly gain. The latest release has it at 7.5 percent higher than a year earlier. Additionally, the rate of increase is accelerating each month, which strongly suggests that the recent bout of inflation is not transitory. The top right panel of Figure 1 demonstrates the pattern.

January’s inflation is the highest in forty years. The last time it was this high was in 1982 when the Federal Reserve Bank had been raising interest rates and restricting money supply to tame inflation, which had climbed to nearly 15 percent a few months earlier. The Fed’s efforts at that time led the U.S. economy into back-to-back severe economic recessions. That same policy of raising interest rates will come into play this year as well as a means to break the ever-increasing cycle of inflation. Mortgage rates have already been rising over the last few months in response to the inflationary scenario.

Appliances reversed a pattern of moderating inflation, rising by 8.5 percent year-over-year in January.

Inflation for both goods and services has been rising for nearly a year. (Figure 2.) Prices for goods are increasing at a much faster 12.3 percent rate since it’s much easier for businesses to quickly adjust prices in a reaction to changes in supply and demand. They do so through both price increases or by the more subtle tactic of reducing quantity or volume while charging the same price. These adjustments may or may not be captured in the price data gathered the Bureau of Labor Statistics.

In contrast, prices for services have risen a much slower 4.6 percent over the last year. Wages make up a large component of services. Those salaries are more rigid since they are not usually adjusted more than once a year. Thus, the cost of services reacts more slowly to supply and demand pressures.

However, the rising tendency of services inflation is visually apparent in Figure 2, where prices have more than tripled over the last year. Services prices were rising at just 1.3 percent annually a year ago.

Within our industry, the Bureau of Labor Statistics provides price inflation data for only three product categories. They are Appliances, Windows and Flooring, shown in Figure 3. Prices for the first two categories are rising a rate higher than the overall inflation pace of 7.5 perecent.

Prices for windows have risen the sharpest, consistently moving up since October of last year. They are over 16 percent higher in January vs. a year ago. Meanwhile, price inflation for household appliances is 8.5 percent higher than last year, which is the sharpest increase since the category was first measured in 2000.

Prices for flooring products, whether wood, vinyl, or carpeting, are also rising rapidly. The pace of the last three months is the highest since January 2001.

Although total price inflation for all housing goods and services combined, at 5.7 percent in January, is below each of those three categories as well as that of overall inflation, the pattern, as seen in the top left panel of Figure 3, is one of a nearly straight line rise since February of 2021.