As I've been reporting for the past few months, inflation according to the CPI is running a solid 2%. June figures released today in fact suggest it might be picking up a bit.
Huge swings in energy prices have made headline inflation statistics quite volatile in recent years. Taking out energy prices, however, reveals that inflation has been pretty steady at 2% per year for the past 15 ½ years, as the chart above shows.
Over the past six months, the core (ex food and energy) rate of CPI inflation has actually risen at a 2.3% annualized pace. The headline rate has risen at a 1.3% annualized rate in the past six months and at a 3.5% annualized rate over the past three months. Absolutely no signs of deflation here—the real issue is whether we're in the early stages of an acceleration in inflation or not. Still too early to tell, but this bears watching.
The chart above attempts to show that changes in housing prices can be an important driver of inflation with an 18-month lag. The blue line shows the year over year change in housing prices according to Case Shiller, while the red line shows the year over year change in the Owner's Equivalent Rent subcomponent of the CPI (which makes up about 25% of the total CPI). Rents by this measure are up almost 3% in the past year, reflecting the acceleration in housing prices in the past several years.
Speaking of the housing market, today's June data for housing starts were much stronger than expected, and now show that the housing market has been quite strong this year.
Building permits have been on fire of late, rising 30% over the past year! This, combined with the recent rise in homebuilder sentiment (see the preceding chart above), strongly suggests that housing starts will continue to rise in coming months.
Inflation is alive and well, and so is the housing market. And, most likely, so is the U.S. economy. The Fed is absolutely justified in beginning to raise short-term interest rates, and the sooner the better, in my estimation.
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