Key Takeaways:

• Goods are up 9% year-over-year, vs. 3% for services;
• Within K&B, major appliances are 7.6% higher than last year, the smallest increase since last September;
• Windows are up a sharp 9.2% following eight consecutive months of YOY declines; Flooring up a modest 1.8%;
• Longer-term, housing inflation since 2010 is at 30%, modestly higher than the overall 26%.

By Manuel Gutierrez, Consulting Economist to NKBA

The pace of consumer price increases eased ever so slightly in August, with the overall Consumer Price Index coming at 5.3% higher than last year. This is modestly better than the 5.4% seen in July.

It’s too early to tell, however, whether this means the threat of inflation has stabilized, as the price directions for goods and services have recently been following different paths.

The major contributor to the rise in prices is the cost of goods, which is up 9% compared to last year, while services is just 3% higher. Goods and services do not carry the same weight in the CPI. Services have a greater influence, since they account for 58% of all consumer purchases, compared with 42% for goods.

Although prices of major appliance were up 7.6% in August, year-over-year, it’s the smallest price increase since last September.

Figure 1 clearly shows that these two sources have followed different trajectories, particularly since the beginning of this year.

Although prices for both have increased, goods are rising at triple the rate. When the pandemic first began, prices for goods collapsed sharply, but began a strong recovery in mid-2020.

In contrast, prices for services fell more modestly, but also had a more modest recovery.

The sharp rise of prices for goods is driven by strong consumer demand compounded by product shortages.  In the auto industry, for instance, car sales have stalled because of the lack of computer chips. The high demand combined with supply shortages have resulted in higher prices.

In contrast, services costs have remained relatively stable due to weaker consumer demand. Many consumers have been reluctant to purchase some of those services, such as cruises, because of a lingering fear of human contact. Additionally, there have been a multitude of restrictions imposed in sectors such as restaurants and health care.

Figure 2 displays recent price trend for product categories within the remodeling industry: Appliances — and separately, Major Appliances — Windows and Flooring. These are the only subgroups pertinent to kitchen and bath for which the Bureau of Labor Statistics provides price inflation data. Jointly, they represent less than 2% of household budgets.

Prices for Appliances, shown in the top-left panel of Figure 2, were 4.3% higher in August than for the same month last year, although, as can also be seen, the pace of increases has cooled since its peak of 7.9% in March.

Price inflation for Major Appliances is currently 7.6% higher, but that’s the lowest it’s been since September 2020.

For Windows and Flooring, shown at the bottom of Figure 2, price trends are more erratic.

Prices for household windows shot up by 17% for the month in August, following a number of months of actual price declines. Compared to last year, August’s increase translates into the 9.2% shown in Figure 2.

Flooring prices are up a more modest 1.8% for the year, much lower than the preceding two months.

Recent increases have bucked the long-term decline in prices for these products. This is highlighted in Figure 3, which displays trends for the last decade compared to all housing products and services combined, and also to the overall Consumer Price Index.

Over the last decade, overall price inflation is 26% (black line), an average of just under 2.6% per year.

Total housing costs, which include all products and services used in the home, such as general house-maintenance costs, electricity, rental costs, water/sewer charges and similar subgroups, have risen at a higher 30% over the same period.

In contrast, prices for the specific products highlighted earlier are actually lower today than they were 10 years ago. Flooring products are 1.1% below levels from 2010. Appliances are down 3.3%, while windows are down a sharper 7%.