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Brian Jacobsen

Consumer inflation and housing starts: Full steam ahead for the Fed

AdvantageVoice® Blog—4-16-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2% in March. Year on year, the CPI-U increased 1.5%, well below the Federal Reserve’s (Fed’s) 2% inflation target. CPI-U declined in March mainly due to declines in energy and commodity prices. All other categories rose meager amounts. Year over year, medical care services increased the most, 3.9%, while gasoline costs decreased the most, 3.1%.¬†

The low rate of inflation gives the Fed plenty of room to focus on keeping mortgage rates low. Mortgage rates will likely be a key factor in the Fed’s determination of when it would be best to start slowing the pace of its asset purchases. The summer is peak selling season for homes, and it’s unlikely the Fed will want to mess much with mortgage rates by tapering its asset purchases before September.

Housing starts rose an unusually large amount in March, up 7% from February and up 46.7% from March 2012. The increase in multifamily starts drove the housing starts number higher, considering single-family starts actually declined 4.8% from February. These numbers point to not only how effective Fed policy can be in stimulating interest-rate-sensitive sectors of the economy like housing but also how much perceived demand there is for renting over owning. People still seem to like the option value of renting over owning: It’s easier to move to a new location or downsize when ¬†renting compared with selling a home. I don’t expect that pattern to change much anytime soon.

The views expressed are as of 4-16-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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