By Mariah Brown
Consumer prices barely increased in February but the Federal Reserve Board raised interest rates because of increasing inflation, signaling the strength of the economy.
The consumer price index, a scale tracking the costs of goods and services month-after-month, showed consumer prices increased 0.1 percent for the month of March. This month’s point percentage increase was small in comparison to past month-over-month increases of 0.6 since July 2016.The year-over-year increase was 2.7 percent, which is the highest yearly increase since 2012.
This past Wednesday, Yellen announced a rise in the Fed’s benchmark interest rate by a quarter point. The interest rate went up from a range of 0.75 percent to 1 percent because of streamlined inflation and employment growth.
“The simple message is the economy’s doing well,” said the Chair of the Federal Reserve Board, Janet Yellen.
The Fed raising interest rates is a result of other changes in the CPI. The core CPI, minus the costs of food and energy, rose 2.2 percent vs 2.3 percent from this past January. Energy prices fell by 1 percent due to the decline in gasoline prices.
A major component in this month’s CPI is the 0.5 percent decrease in transportation after being up 2.2 percent in January. The dip in transportation prices is because of the lower costs of motor fuel. Also, there was a 0.7 percent increase in utilities and home fuel.
The current pace of inflation and statements from the Fed to maintain its target goal of 2 percent inflation, gave economists the high sign that an interest rate hike would happen.
“The Federal Reserve looked at inflation and labor market data and said ‘we have a window of opportunity,’” said Barclay’s Chief U.S. Economist Michael Gapen. “The Fed came into this year expecting to do three hikes.”
However, with inflation and rate hikes the economy remains unaffected by the Fed’s increase, which impacts borrowers – people looking to take out car and mortgage loans, according to Tom Simons a Money Market Economist at Jefferies.
“I don’t think that increasing the feds fund rate by a quarter percent drives mortgage interest rates so high that borrowers start balking,” Simons said. “Borrowing rates are still seen by consumers as relatively attractive.”
Mortgage Broker Greg Fox has seen no slowdown in interest in buying homes in Southern California.
“As long as the interest rates are gradual the markets will adapt,” said Fox. “If it was me right now, I would be buying instead of renting. Especially, because historically speaking these rates are low, so why not?”
The Case-Shiller housing index, a scale that measures the changes in house prices, for Los Angeles, California is at a current level of 254.51, up from 252.84 month-after-month and up from 241.51 year-over-year. This is a 5.38 percent increase from a year ago and a 0.66 percent increase from last month.
The price increases could be unattractive for consumers, said Fox.
“I’ve seen property values skyrocket. The property values in Southern California are absurd,” said Fox. “I’ve seen home prices for half a million dollars in not the greatest neighborhoods, it’s pure insanity.”
The Fed’s interest in keeping inflation in check could conflict with President Trump’s plan to boost the economy through tax cuts, all of which could bolster inflation and spur the Fed to raise interest rates.
“We’re already talking about inflation that is rising organically. if you have another boost in overall demand because of proposed tax cuts and boosting inflation even further, the Fed could raise interest rates more quickly,” said Simons.
The Federal Reserve plans on at least two more rate hikes before the end of the year. The raise may or may not have a greater impact than this past week’s, said Gapen. Another raise by the Fed would be an effort to stop any threats of inflation.