Key Takeaways:
- After several years of inflation hovering below 2 percent, prices have marched upward every month since August of last year.
- The “goods” portion of inflation rose a whopping 12.1 percent in December.
- Annual price growth for categories measured within the Construction Industry are led by Windows at 12.9 percent, with major appliances 8.4 percent higher.
By Manuel Gutierrez, Consulting Economist to NKBA
Inflation continued its upward climb in December, with consumer prices registering a rise of 7.1 percent over the previous year. Annual price inflation, as shown in Figure 1, has increased at a higher rate each month since August of last year.
Prior to the pandemic, inflation had hovered below 2 percent for several years, and in December of 2020 came in at 1.3 percent. This is illustrated in the bottom chart of Figure 1, which displays long term price inflation since 1952.
December’s 7.1 percent inflation is the highest in nearly 40 years. October 1981 was the last time the nation faced higher inflation. At that time Fed Chairman Paul Volcker adopted tight monetary controls to squeeze inflation out of the system. This led to a period of slowly rising prices for the next thirty years.
December’s 7.1 percent inflation is the highest in nearly 40 years.
Several factors underlie the recent rapid rise in inflation. One that is usually in the forefront of discussions is the supply chain logjam, as delays get in the way of strong consumer demand. However, ultimately right or wrong given the massive challenges the economy was facing due to the pandemic, it is government policies of huge deficit spending, generous giveaways and an accommodating monetary policy that has led to conditions that were ripe for a rapid ramp in inflation. Additionally, more workers staying home or quitting their jobs has led to lower production and resulting higher prices.
Inflation’s impact so far has mostly been seen in the form of rising prices of goods. These were up a concerning 12.1percent in December (Figure 2), while services inflation rose a more modest 4 percent, but nevertheless was more than double the 1.7 percent rate of last February.
Prices for services tend to react slower than goods to demand pressures because the main components are wages of individual who provide those services.
Although historically prices for goods and services used for housing have tended to grow faster than overall inflation, over the last year housing has trailed, rising by 5.1 percent vs. the 7.1 percent for all ( Figure 3).
Within our industry, prices for only three specific products are tracked by the Labor Department, as shown in Figure 3.
Highest inflation among them is for Windows, which rose by 12.9 percent in December vs. the previous year. This is the largest price increase for windows since 2003, when these data were first collected. This is highly unusual given that window prices had generally been falling year after year, before suddenly reversing over the last five months. However, despite these price gains windows are 28 percent below their level of 2003. Meanwhile, price inflation for appliances currently stands at 6 percent, slightly below the 8 percent pace at the beginning of last year. Major appliances face higher inflation at 8.4 percent in December. Finally, Flooring products used for housing are up a more modest 6.8 percent in December, but still more than double levels of the early 2000’s.
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