Is Inflation Happening?

As real estate investors there are certain aspects of the national economy, such as inflation, that can have a significant impact on us. Two percent inflation on the value of a property which I bought with 10 percent down is effectively a 20 percent return on my down payment. To see inflation trends we can look at national policies, national indices, or clues all around us.

One can look at some of the source causes of inflation such as the amount of quantitative easing (QE) done by the Federal Reserve recently ($85 billion per month by some reports). Although this will clearly cause inflation in the future, the exact magnitude is difficult to determine.

Another way to track inflation is to look at national indices such as the Consumer Price Index. Looking at one year periods ending in recent months up through August, the CPI indicates annual inflation is between 1.5 and 2 percent (). These indices are typically a month or two behind, and may be convoluted by factors other than inflation. Specific indices for the part of the market that affect us, might shed light on home values and rents. The Housing Price Index shows that housing prices rose 2.1 percent in the second quarter of 2013 (). CPI for rent rose 3 percent from August of last year to August 2013.

Has QE and other inflation pressures made their way to the housing market or is a spike coming? Arguably there are delays for inflation reaching the housing market. Maybe excess inventory in the housing market has delayed the true impact of inflation on home prices. The number of properties purchased below replacement cost provides a clue. In addition to excess inventory, housing might be one of the last sectors to see the inflation wave. One possible path for inflation might look like this: commodities / raw materials increase in price; some time later consumables increase in price; some time later workers are pinched tight enough to demand higher wages; only then will renters and home buyers be able to pay more for housing. I am not an expert on any of this, but can see how the complexities and lags create a future that is difficult to predict. Are there any other inflation indicators that may help? They can be found in clues all around us. Seeing one of these clues was my reason for this post.

My family loves Club crackers. With their crisp buttery goodness, they are a must with soup, chili and many other meals. Because they are on the regular shopping list, we have a pretty good feel for the cost. This week, my wife bought a box, like she had done many times before. The price was pretty much the same. Although, something seemed off. Pulling the old box out of the recycle bin, showed that they had clearly been downsized. We thought, it didn’t seem too much smaller, until we opened the box. Not only is the box smaller, but we bought a little more air this time.

Ultimately the size went from 14 oz to 11.7 oz. The same dollars buy 16.4 percent less crackers. It takes 1.197 new boxes to equal same crackers in the old box. The Club Cracker Index shows an inflationary spike in consumables of 19.7 percent.

God bless and keep moving forward