Producer Prices in February – Building Materials Prices Continue to Outpace the Rest

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for February. Energy prices, rising 3.0% based largely on gasoline prices, pushed the overall index up 0.7%. Food prices declined 0.5% while the core price index (i.e., excluding food and energy) was stable, rising 0.2% since last month.

While overall producer prices have been relatively stable, the prices for certain building materials have risen rapidly as the housing recovery has gained momentum since the beginning of 2012. Overall producer prices are up less than 3% while softwood lumber, OSB and gypsum prices are 30%, 80% and 26% higher than at the start of 2012.

The rising prices of these building materials represent a significant challenge for home builders as they find themselves squeezed between rising input prices and a housing market where prices are only recently recovering from their steep declines.

 

Headline Inflation Slows, but Core Inflation Accelerates

The Bureau of Labor Statistics reported that the Consumer Price Index for Urban Consumers (CPI-U), a measure of inflation, slowed in the month of October to 0.1% on a seasonally adjusted basis. In August and September, the same measure rose by 0.6% per month. The deceleration in the CPI-U largely reflects a 0.2% decline in energy prices from 5.6% growth in August and 4.5% growth in September. The graph below shoes that the difference between top-line and core inflation is mainly energy price inflation.

Although the fuel oil price index rose by 1.1% in October, the gasoline index fell by 0.6%. Meanwhile, food prices increased by 0.2% in October accelerating from the 0.1% rate of inflation in September as the food at home index, which was unchanged in September, grew by 0.3% in October. Over the twelve month period ending in October 2012, the CPI-U rose by 2.2% before the seasonal adjustment.

While headline inflation slowed in October from its pace in August and September, core CPI-U accelerated. Core CPI-U, which excludes volatile food and energy prices and is considered a better representation of the underlying fundamentals in the price level, grew by 0.2% in October.  In September, core CPI-U rose by 0.1%. Acceleration in core-CPI reflected a 0.3% increase in the shelter index. However, the price increase in the shelter index, which accounts for 41.4% of core CPI-U and 32.0% of CPI-U, were partially offset by price declines in the indexes for new and used vehicles. Over the twelve month period ending in October 2012, core CPI-U rose by 2.0% on an unadjusted basis.

Despite the recent increase in shelter prices, the real cost of shelter remains depressed. NAHB constructs a real shelter index by deflating the CPI for shelter using the core CPI. The path of this real shelter index rises when rent inflation outpaces core inflation and declines when core inflation rises faster than inflation in rents. After experiencing a decline that began soon after the onset of a recession in August 1990 and ended in November 1993, real shelter costs grew uninterrupted until December 2008. After peaking, real shelter costs declined by 2.3% between December 2008 and August 2012 and have remained relatively unchanged until the most recent quarter. The decline in the real shelter index indicates that the influence of the shelter prices on core inflation has waned, even as the shelter prices have risen. While shelter prices rose by 3.6% between December 2008 and August 2012, core inflation rose by 6.2%. Since August 2012, the real shelter index has risen by 0.2%, indicating that it has been a principal influence in the recent growth of core inflation.

Sharp Decline in Energy Prices Pushes CPI Lower

Today’s release for the Consumer Price Index for All Urban Consumers (CPI-U) showed a 0.3% decline between April and May 2012. The energy index accounted for most of the drag on topline CPI last month, falling an additional 4.3% after a 1.7% drop in April. The latest decline represented the largest percentage contraction in the energy index since December 2008—a time period in which energy prices were falling sharply in response to the deepening recession. Gasoline prices contributed significantly to the decline in the broader energy index, averaging $3.79 over the course of May, a 4.2% decline from April. Prices fell throughout the month of May and have trended lower through the first two weeks in June ($3.63 nationally as of 6/11), which points to additional downward pressure on the energy index and overall CPI.

Core CPI, which excludes the often-volatile food and energy goods, increased 0.2 percent month-to-month in May, roughly the same rate of growth it has averaged since the beginning of 2011. On a year-over-year basis, core CPI advanced 2.3% for the fourth time in the last five months. The shelter index, which serves as a proxy measure of overall housing costs, maintained its slow and steady march higher by increasing 0.2% on a month-to-month basis for the 11^th time in 12 months. For rental housing, NAHB separately constructs a measure of real rental rates from the CPI for rent of primary residences and overall CPI. On an annualized basis, the real rent index jumped 6 percent in May, based on a trend-like increase in rents coupled with the sharp (annualized) decline in overall inflation. In addition, this marked the largest percentage jump in this metric since late 2008.

Producer Prices in February – Higher Prices for Gypsum

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for February last week (PPI). The PPI for finished goods rose 0.4 percent in February from January on a seasonally adjusted basis. Excluding food and energy, the core index for finished goods rose 0.2 percent. The monthly data can be volatile, but these growth rates are roughly in line with their averages over the prior twelve months. The PPIs for energy and food have been driving the changes in the PPI for finished goods in recent months.

Over longer periods high energy costs are transmitted into the core PPIs, not as a direct input, but indirectly through the production process of other inputs. The spike in energy prices that peaked in mid-2008 fed increasing inflation in the core PPI for finished goods, before declining energy prices in the second half of the year slowed core inflation through 2009. Rising energy prices have filtered through to core PPI again in 2011, but the deceleration in energy prices points to a decelerating core PPI for finished goods in 2012.

With respect to building materials, gypsum prices continue to be the main driver for residential construction in 2012, rising 5.1 percent in February from January on a seasonally adjusted basis, following a January increase of 5.9 percent. This puts February gypsum prices 15.2 percent higher than February last year.

Cement and lumber prices, in contrast, are 2.2 percent and 1.6 percent higher than a year ago, respectively. Overall, prices for inputs to residential construction are 4.4 percent above one year ago.

 

Surging Gasoline Prices Boost Overall CPI in March

The Consumer Price Index for All Urban Consumers (CPI-U) jumped 0.4% on a month-to-month basis during February 2012. Although the core and food CPI indices registered very modest gains, energy prices increased 3.2% and accounted for the vast majority of last month’s gain in the overall CPI. In fact, had natural gas prices not posted their fifth consecutive month-to-month decline, the contribution from the energy index would have been even larger during February. The monthly national average retail price of gasoline (across all formulations) increased 20 cents per gallon (or nearly 6%) between January and February; with retail prices at the pump having gained an additional 10 cents per gallon nationally through mid-March, energy will likely bolster topline CPI for March.

The shelter index, which serves as the CPI’s broad measure of housing costs, increased 0.2% in February—the identical rate that it has averaged over the prior 8 months. On a year-over-year basis, the shelter index increased just above 2%. Looking more specifically at the rental market, NAHB’s measure of real rental rates, which is constructed from the CPI for rent of primary residences and overall CPI, fell for the second consecutive month during February. Recent data from NAHB point to the multifamily housing market stabilizing to some degree after conditions tightened significantly over the course of 2010.

Although NAHB’s real rent index suggests weaker demand for apartments, the softening in the real rent index is a result of energy prices pushing the overall CPI up at a faster rate than rents. An accelerating pace of payroll growth (and by extension stronger household formations), as well as ongoing difficulties for potential homebuyers in obtaining credit will bolster apartment demand further going forward and likely put additional upward pressure on asking rents.

Producer Prices in January – Watch Gypsum

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for January on Thursday. The index for finished goods rose 0.1 percent in January from December, balancing a 0.4 percent increase in the core index and declines in the food (-0.3 percent) and energy (-0.5 percent) indexes, keeping the overall index in line with its relatively flat trajectory of 2011.

The PPI for residential construction moved up a modest 0.6 percent in January with help from soft lumber prices (0.2% increase), but in spite of large increases in cement (2.8% increase) and gypsum (5.9% increase). As we have noted previously

(
http://eyeonhousing.wordpress.com/2011/11/03/sharp-rise-in-gypsum-prices-likely-in-new-year/
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in late 2011 gypsum producers informed customers of planned price increases for 2012. Some NAHB members have confirmed the higher prices have taken effect, and the PPI provides additional evidence.

It is possible that the pattern of 2010 and 2011 will be repeated, with increases early in the year reversed over subsequent months, but this is an issue we will continue to watch closely.

 

CPI Holds Steady while Real Rents Notch Third Consecutive Monthly Increase

The Bureau of Labor Statistics (BLS) reported the Consumer Price Index for All Urban Consumers (CPI-U) remained unchanged for the second month in a row. An easing in prices across much of the energy commodities complex weighed on topline CPI growth throughout the fourth quarter of 2011, offsetting the gains in the core (all items less food and energy) and food CPIs. For the calendar year as a whole, CPI-U increased 3.2%–roughly double the rate of increase observed during 2010.

Core CPI has posted gains in 35 of the last 36 months, but even with such a long period of nearly uninterrupted growth the overall rate of price level growth for non-food and non-energy consumer goods and services has remained modest. Indeed, compared to December 2010 core CPI has increased 2.2% and at a relatively tepid rate of 1.4% per annum since 2008.

Among the various subcomponents of core CPI, the indexes for shelter, recreation, medical care, and tobacco all posted increases, offsetting weaker readings for used cars and trucks, new vehicles, and apparel. The shelter index registered its 16^th consecutive month-to-month increase, but as has been the case with many types of consumer goods and services, the rate of increase has been modest with a gain of 1.3% for calendar year 2011.

With apartment vacancy rates tightening appreciably over the past few quarters, rental rates have started to rebound. Indeed, NAHB’s measure of real rental rates, which is constructed from the CPI for rent of primary residences and overall CPI, increased at an average annualized rate of 2.6% during the fourth quarter of 2011. Apartment vacancy rates could decline further over the course of 2012 as household formations among the key renter age cohorts recover. In turn, real rents would likely increase over the near term.

House Prices Remain Stable in October

House prices remained steady in October, with the Federal Housing Finance Agency (FHFA) reporting a slight 0.2% (SA) decrease in the monthly purchase-only house price index (HPI). This follows a revised 0.4% increase in September. Despite some minor month-over-month variability, the index has exhibited a slight upward trend since April. The decline following the expiry of the homebuyer tax credit is now in the rear-view mirror, but continues to be observed in the annual change, with the index remaining 2.8% (NSA) below its October 2010 level. Nonetheless, this is a marked improvement on the 6.1% year-over-year decline observed in April.

 

Across the regions, there was a modest gain in the HPI for three of the nine Census divisions on a seasonally adjusted basis, but the other six divisions edged down. A solid gain was observed in East South Central (+2.0% SA), while gains in the West North Central (+0.1%) and West South Central (+0.2%) were slight. Moderate declines of between 0.5% and 1.0% were observed in the other divisions (with the exception of Pacific, -0.1%).

While the general trend in October was to give back some of the gains from the previous month, overall the Census divisions have either shown modest improvement or remained flat since April. As the charts show, the HPIs in West North Central, East North Central, East South Central and South Atlantic divisions have made moderate gains since April, while the indexes for Pacific, Mountain, West South Central, Middle Atlantic and New England divisions have remained flat over the past six months. The state-level HPI data are only provided quarterly, but the recent improvement in house prices by state can be observed by following this link.

The slight upward trend observed in the FHFA HPI over the past six months has been mirrored by the Case-Shiller composite HPIs, confirming that house prices have stabilized. We expect house prices to remain relatively flat, with no further significant declines, over the remainder of 2011, and anticipate steady, albeit modest, gains through 2012 and 2013.

Residential Building Material Prices Show Modest Decline in November, But Pressure is Building for Sharp Increase in the New Year

Producer prices bounced back in November after easing the previous month. The Bureau of Labor Statistics reported the producer price index for finished goods (PPI) advanced 0.3%, seasonally adjusted, in November on the back of a jump in food prices. Modest changes were observed for the energy and core indexes as both recorded a 0.1% increase. The finished goods index has risen in nine of the eleven months this year and is up 5.7% relative to November 2010.

 

The index for consumer foods registered a gain of 1.0% (SA), driven by a marked increase in fresh and dry vegetables (+11.5% SA) and fresh fruits (+4.7%), as well as chicken (+8.0%), pork (+3.2%) and turkey (+1.6%). This is the sixth consecutive monthly increase in the consumer foods index, with the index up 7.8% for the 12 months ended November 2011.

Energy prices, particularly the gasoline index, have been driving the trend of the PPI for more than a year. However, in November, with minimal changes in the gasoline pump prices (-0.1%), the energy index remained relatively flat. While there was a rise in home heating oil and distillates (+9.4%), this was offset by decreasing prices for residential gas (-2.0%) and residential electric power (-0.5%).

The only modest increase in gasoline prices is surprising given that oil prices (the spot price for West Texas Intermediate) have been on the rise for the past three months. From its low of $79.43 per barrel in late-September, the oil price rose to almost $100 per barrel in the first week of December, an increase of over 25%. In comparison, gasoline pump prices drifted up modestly in October, then eased through November, but overall are down 4.2% over the same period. This indicates that upward pressure on gasoline prices is building, such that we can expect to return to very strong growth in the energy price index begin next month (December) and extending into the New Year. Given that rising gasoline prices have been the main driver of the growth in the PPI for finished goods over the past year, we can expect that increase in gasoline prices will be reflected in an increase in the finished goods index. Similarly, gasoline prices also have a heavy influence on the building materials composite index, and the price of individual building materials, due to increasing processing and transport costs. Therefore, a strong increase in prices of building materials can also be expected in 2012.

Core PPI, finished goods less food and energy prices, remained relatively flat for the past four months. In November, higher prices were observed for pharmaceuticals (+0.9% SA), passenger cars (+0.6%) and, men’s (+0.6%) and women’s (+0.5%) clothing, but there was little change in most other items.

With energy prices remaining relatively flat, the composite index of inputs into residential construction was unchanged in November. Notable declines were observed for asphalt roofing and siding (-5.4%), copper (-2.7%), steel (-1.1%) and lumber (-1.1%). These were balanced out by increases in cement (+1.2), ready-mix concrete (+0.8%), plywood (+0.7%), oriented strand board (+0.5%), and bricks (+0.5%). The building materials composite index has remained relatively flat since June, but gains earlier in the year have left the index up 5.5% relative to November 2010. While still high, this is the smallest percentage year-over-year increase since February 2011.

We continue to monitor gypsum prices following the announcement by several of the major gypsum producers in late September-early October that they would be ceasing job quotes immediately and increasing prices by 35% in January 2012; see Sharp Rise in Gypsum Prices Likely in New Year. For the time being, prices settled back in November, down a 0.4%, following a 3.0% rise in October — the month of the announcement. A 35% spike would raise price gypsum prices well above their long term trend, to levels last seen near the peak of the housing cycle in 2006. However, prices may not rise the full amount. While four of the manufacturers have indicated that they will raise their prices by 35%, the other four are yet to announce their intentions. Thus, there may be some horse trading, with these four proposing more modest price increases of 15-20% in an effort to gain market share. Nevertheless, gypsum prices will rise sharply in the new year, which will increase the cost of housing construction in what is already a very difficult market for home builders.

Slower CPI Growth in October, But Real Rents Accelerate

The 16-month run of steady growth in the Consumer Price Index (CPI) months took a pause in October, registering only the second month-over-month decline since June of 2010. The October reading of the CPI for All Urban Consumers by the Bureau of Labor Statistics (BLS) revealed a 0.1% (SA) decrease. An easing in energy prices drove the decline in the all items index; meanwhile, the food and core indexes showed modest increases from the previous month. The 12-month change remains strongly positive, with the all items index up 3.5% (NSA) relative to October 2010. However, this represents a modest pullback from last month’s reported 3.9% increase.

 

The energy index fell 2.0% (SA) in October, driven by a 3.1% decrease in gasoline prices. The household energy index (-0.3%) also fell, with declines in the indexes for natural gas (-3.0%) and fuel oil (-0.5%) more than offsetting a rise in the electricity index (+0.4%). Despite easing in October, the energy index is 14.2% higher than it was in October 2010.

The rate of increase in the food index slowed in October, rising just 0.1% after increasing 0.4% in September. The deceleration was largely due to a decrease in the cost fruit and vegetables, with the price index for fresh fruits (-3.0%) and fresh vegetables (-2.4%) both declining sharply. Most other grocery items posted modest increases.

Core CPI, the index for all items less food and energy, increased by 0.1% in October — the same rate of increase as September. Gains in the shelter (+0.2%), medical care (+0.5%) and apparel indexes (+0.4%) were almost balanced by declines in the indexes for new vehicles (-0.3%), used cars and trucks (-0.6%) and recreation (-0.1%). With a string of twelve consecutive month-over-month increases, core CPI has gained 2.1% since October 2010.

The 0.2% advance in October is the 13^th consecutive increase in the shelter index. Overall, the shelter index has climbed 1.8% on a year-over-year basis. The rate of growth of owners’ equivalent rent and rent of primary residence accelerated in October, up 0.2% and 0.4%, respectively, compared to 0.1% and 0.2% in September. In the past year, these subcomponents have risen 1.6% and 2.4%, respectively.

In real terms, the index of rent of primary residences advanced 0.5% in October — the 0.4% rate of increase in the index for rent on primary residences extended by the 0.1% decrease in the CPI for all items. The increase in October marks a departure from the relatively flat trend observed in the real rent index over the previous six months. Overall, the real rent index remains 1.2 points lower than it was in October 2010.