Inflation Ticks Upwards, Housing Improves in U.S.

Indications of quickening inflation and improvements in the housing market indicate the U.S. economy is continuing to improve.

The Consumer Price Index rose 0.2% in October according to the Federal Reserve Bank of Cleveland, while the Bureau of Labor Statistics also reported the same seasonally adjusted CPI for urban consumers.

Indications of quickening inflation and improvements in the housing market indicate the U.S. economy is continuing to improve.

The Consumer Price Index rose 0.2% in October according to the Federal Reserve Bank of Cleveland, while the Bureau of Labor Statistics also reported the same seasonally adjusted CPI for urban consumers.

While still low, the annualized inflation rate has ticked sharply upwards, rising to 2.5% in October. The CPI minus food and energy was also up 2.5%, indicating that the price gains are not just a result of easier comparable on oil, but are a result of robust price gains throughout the economy.

The Federal Reserve did not suggest whether the pickup in inflation was due to stronger demand or lower supplies, although some investment bank analysts have already released notes arguing that low capacity utilization rates and recent indications of weakening inventories and significant slack in productivity suggest that the pickup is a result of robust demand and not of undersupply. This may drive more manufacturing and economic activity in the near term, providing a virtuous cycle that improves aggregate growth rates.

A December Rate Hike?

With a strong pickup in inflation, questions abound regarding the possibility that the Federal Reserve will raise its interest rate target—a much-obsessed issue in the financial world over the last two years, as many pundits point to an inevitable rate hike.

Analysts and Fed Chairwoman Janet Yellen have dismissed insistent cries for a higher target by pointing at weak inflation and jobs data. With the unemployment rate falling to 5% in October and expectations of a declining unemployment rate for the rest of the year, many suggest the labor market is robust enough to withstand a rate hike.

Now with annualized CPI growth above 2%, the chances of a rate hike seem significantly higher. Some analysts still caution that the Fed may take its time raising rates, as some key indicators—such as the labor participation rate—remain substantially depressed.

Housing Uncertainty

An additional cause for hesitation over raising rates is the housing market, which is both seeing an improvement and showing signs of a plateau. The Mortgage Bankers’ Association released a report showing that foreclosures and delinquencies continued to decline in the 3rd quarter of 2015, with delinquency rates for residential properties falling to 4.99% of all outstanding loans, the lowest level since the beginning of 2007. The rate remains historically high, but it has fallen substantially from the 14% peak of foreclosures and delinquencies observed in early 2010.

At the same time, homebuilders posted declining confidence in the market. In November, the National Association of Home Builders saw its housing market index fall to 62, a fall of 3 points from the prior month. While that still indicates sales are good, the decline indicates a weakening in a market where low interest rates remain easy to obtain.

Nonetheless, NAHB Chief Economist David Crowe dismisses the fall as a relic of seasonality and not an indication of a change in the trend of improving housing. “The November report is pullback from an unusually high October, and is more in line with the consistent, modest growth that we have seen throughout the year,” he said, adding that affordable interest rates remained key for homebuilding activity to remain robust in 2016.