Tuesday, June 21, 2011

Consumer prices in May in western U.S. climb 3.2 percent

The Bureau of Labor Statistics released last week the May CPI for US urban areas and regions. In the West region, from May 2010 to May 2011, the CPI increased 3.2 percent. This is the largest year-over-year increase since 2008, before the deflationary effects of the 2007-2009 recession began to be felt.

In the first graph, we can see that the CPI growth in May 2011 is now at the third-highest increase observed for May during the past ten years. Only 2006 and 2008 showed larger increases, and price increases in those years were partially countered by strong growth in employment and incomes, but at the present time, income growth has been flat in recent years, as discussed here.

The price increases are being largely driven by transportation costs, such as gasoline, which increased by 11.1 percent, year over year. Food costs also increased significantly, rising 3.7 percent.

Recent price increases will impact household calculations and attitudes on spending as many households conclude that discretionary spending will need to be scaled back in the face of increasing food and transportation costs. These price increases come in the face of continued lackluster performance in the labor markets as discussed here.

This in turn will have effects on home purchase activity as well. Note: In addition to the issue of disposable income is the issue of interest rates. Should the Federal Reserve conclude that inflation does need to be addressed, the resulting increase in interest rates would also push down home purchase activity.

The second graph shows year-over-year changes in CPI for all months since 2002. If current trends continue, CPI growth will return to pre-recession levels in coming months.