Inflation: A Cinnamon Roll Story--Part One

On January 12, 2022, the Bureau of Labor Statistics (BLS) released its Consumer Price Index (CPI) for the 12-month period ending December 2021. For anyone who had been to a store, it was an unsurprisingly high number. From January 1 through December 31, 2021, the all-items index rose 7.0%. For most measured goods, market demand is at or exceeding pre-pandemic levels, this demand, coupled with supply chain interruptions and low interest rates, has led to the highest inflation experience since 1982.

Of great interest, pardon the pun, to me is the impact these same forces have had on home prices. CPI does not measure home prices, per se. They use a measurement called, “Owners’ equivalent rent of primary residence (OER).” This measures the “implicit rent that owner occupants would have to pay if they were renting their homes.” To capture this number, which raised 3.8% year over year, a survey team contacts homeowners and asks the following question, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” In other words, the number is a figment of your neighbor’s imagination.

A more effective tool for understanding the impact inflation has had on the housing market is the Case- Shiller US National Home Price Index. This index works by assuming the price of a home to be 100 in

January 2000. Based on that assumption, it tracks monthly price changes and reports a monthly number equivalent to a 3-month moving average. In April 2020, just after the pandemic had its greatest impact on the national economy, the index sat at 217.5. In October 2021, the most recent month for which we have data, the index sat at 273.05. Prices have gone up approximately 25% across the nation since April

2020.

If you have priced your home, or tried to purchase a home, recently, you can acutely appreciate the increase in prices. This likely led you to the following questions: why the prices are so much higher and what should we expect going forward. These questions are valuable, and I hope to explore the answers in detail. Briefly, though, homes are like other goods in our current economy. They have experienced the impact of two basic economic drivers: demand and supply.

Due to supply constraints in this paper, we are going to end this week with a cliff-hanger. We will pick this back up next week and dig deeper into the demand and supply issues constraining our housing market and how these may resolve themselves in the coming year(s).

Joshua Riggins is the president of Farmers & Mechanics Federal Bank in Bloomfield, and is committed to providing customers with a reliable and competent banking experience.