The Weekly Briefing - April 19th, 2021

The Weekly Briefing – April 19th, 2021

In This Week’s Brief:

  • Temporary Boost in Inflation as Consumers Begin to Unleash Demand
  • Pace of New Home Construction Continues to Ramp Up

Temporary Boost in Inflation as Consumers Begin to Unleash Demand

Following a year of muted inflation, consumer prices in March increased at their fastest pace since 2012, bolstered by transitory inflation pressures emanating from the energy sector. The Consumer Price Index (CPI) rose 0.6% in March from February, yet almost half of the monthly increase can be attributed to a 9.1% jump in prices at the pump. Gasoline is a particularly volatile component of the CPI, and the energy sector has stabilized over the past month. Core CPI, which excludes volatile food and energy prices, rose 0.3% in March.

Year-over-year figures overstate the headline and core inflation figures due to the collapse in prices one year ago. In comparison to this lower baseline, headline consumer prices jumped 2.6% from twelve months ago and core prices were up 1.6% YOY. In other words, prices fell significantly at the onset of the pandemic and current inflation numbers are being compared to extremely weak numbers from March 2020.

Fed officials expect the rise in inflation to be temporary because of growing demand for goods and services fueled by increasing vaccination rates, fewer restrictions on businesses, pandemic-relief programs and ample consumer savings. After a year of pandemic-related restrictions, people are eager to get out and spend, as evidenced by growing prices in the services sector and rising consumer sentiment levels.

Services prices rose 0.4% in March, the quickest pace since July 2020. Unbundling some of the subcomponents of services prices, food away from home was up 3.7% YOY. Limited services meals, which include pickup, take-out and delivery restaurants climbed 6.5%. Prices for hotel stays, car rentals, airfare and sporting event tickets were all up in March. In March, the University of Michigan’s Consumer Sentiment Index reached its highest level in a year and further reinforced the growth in consumer spending. For the first time in the past year, more consumers expected good rather than bad times in the national economy during the year ahead, a significant improvement from last month when negative prospects were held by the majority.

Consumer Price Index (CPI) Values and Monthly Percent Change

Pace of New Home Construction Continues to Ramp Up

The rate of new housing construction picked up last month as homebuilders pulled permits at a seasonally adjusted annual rate of 1,766,000 units, a 2.7% rise over the prior month. Single-family permits drove the overall increase with a 4.6% gain, while multifamily permits pulled back slightly.

Homebuilders continue to maintain a favorable outlook about their business prospects in the face of elevated prices for key construction inputs. The National Association of Homebuilder (NAHB) Index edged up on one point during March to 83, just below the all-time high set in late 2020. Meanwhile, lumber prices are up 216.3% YOY, and the price of copper has also surged.

Despite the jump in construction activity over the past year, the U.S. continues to face a housing shortage that Freddie Mac estimates has grown to 3.8 million units nationwide as of the end of 2020. The shortfall in residential construction is especially wide for entry-level housing as the share of new homes sold for less than $200,000 has shrunk from 43.1% in 2010 to 7.5% last year.

New Houses Sold by Sales Price (Thousands)

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