The Finatical
Week of August 23rd, 2022 - Consumer Price Index, Housing Recession, Household Debt
Topic Breakdown - Learn about the Consumer Price Index (CPI)
Introduction
Most people have never heard of the term CPI, or Consumer Price Index. The Consumer Price Index tracks the monthly change in prices paid by consumers in the United States. Basically, The Consumer Price Index tracks the overall change in consumer prices over time using a representative basket of products and services. Basically, the consumer price index is an indicator of price variation paid by average customers for retail products and other items. In this article, we will also cover how to understand the CPI, as well as the importance of the CPI and how it is used.
Contributing Factors
The Bureau of Labor Statistics (BLS) collects around 95,000 prices every month from approximately 23,000 retail and service companies. To give a more thorough level of data on inflation, two versions of CPI are calculated. CPI-W is generated for Wage Earners in Cities and Clerical Workers. It is based on households with more than half of their income coming from clerical or wage employment. According to the BLS, this includes around 30% of the population. CPI-U is computed for All Urban Consumers, which includes more than 70% of the population. It provides a more representative picture of the general population and is thus more often utilized.
Its Importance
So why is it important to understand the Consumer Price Index? Firstly, it tells us about inflation. An increase in the index's value provides a quantifiable measure of inflation, or the reduction in the purchasing power of the dollar over time. Aside from diminishing consumer buying power, inflation may be highly concerning since it implies that future savings will be worth less. When the CPI index value falls, consumer prices fall over time and the dollar's buying power rises. This is referred to as deflation. While dropping prices may appear to be a good thing, deflation might signal an imminent recession. Essentially, the Consumer Price Index is important to the average person because consumers may understand how inflation affects their purchasing power and make financial decisions appropriately by watching the CPI.
Financial Trends
The U.S. In A “Housing Recession”
In August, the builder sentiment in the home building market for single-family homes drastically fell into negative territory, as both builders and buyers are struggling with higher costs. The National Association of Home Builders/Wells Fargo (NAHB) Housing Market Index dropped by 6 basis points to 49 this month, which marks the eighth consecutive month of a straight monthly decline. The Chief economist of NAHB, Robert Diez, stated in an interview, “Tighter monetary policies from the Federal Reserve and persistently elevated construction costs have brought on a housing recession”. Despite there being an increase in the cost of land, labor, and materials, roughly 1 in 5 builders in August have reported lower prices in the past few months, as an effort to generate more sales and limit cancellations.
Currently, the biggest challenge that home buyers are facing in the market is affordability. Home prices have been increasing since the start of the pandemic, and the rates on 30-year mortgages are now twice as much as they were at the start of the year. Recently, the rate at which home prices were increasing has cooled down because of mortgage rates dropping from their high-interest rates. This is a reason to hope for good news, as there are indications that the rate of inflation is near its peak and long-term interest rates have subsided, which will provide some stability for the demand aspect of the market in the upcoming months.
Household Debt Reaches $16 trillion
In the second quarter of 2022, household debt amounted to more than $16 trillion for the first time in history, due to soaring inflation and auto balances, reported by the New York Federal Reserve on Tuesday. Debt levels have increased throughout the U.S. in various sectors and industries, but they are primarily from mortgages and vehicle purchases. In a blog post, written by the New York Fed it said, “ Americans are borrowing more, but a big part of the increased borrowing is attributable to higher prices”. Credit card balances underwent a surge of $46 billion in the three-month period and over 13% from last year, which has been documented by Fed researchers to be the largest gain in over 20 years.
Mortgage balances also saw a significant increase this year, as they rose by 1.9% for the quarter which is equivalent to $207 billion to $11.4 trillion. This annual increase marked a 9.1% gain from a year ago as home prices exponentially increased during the peak of the pandemic. Along with the elevated levels of inflation, the Fed has raised its interest rates four times so far this year, with the total increase summing up to 2.2 basis percentage points. As a result, these decisions by the Fed have caused 30-year mortgage rates to 5.41%, up more than 2 percentage basis points from the start of the year.
Financial Guidance
“Do one thing every day that scares you.” ― Eleanor Roosevelt
The only way to grow is to step outside of your comfort zone and try something you haven’t before. That being said, this is easier said than done. A good way to start can be to try to do one thing that you haven’t done before every day.
Term of the Week
The National Association of Home Builders/Wells Fargo (NAHB) Housing Market Index
The National Association of Home Builders/Wells Fargo (NAHB) Housing Market Index, also called the HMI for short, is a monthly indicator of the sentiments of the members of the National Association of Home Builders. It serves as an indicator of the housing market and industry, which serves as an overall indicator of the state of the economy. An HMI of 50 or above means there is a positive outlook for the housing market and overall economy.