Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a measure of price increases of 300 consumer-based products (McConnell-Bruce, Chapter 15). The CPI is often part of negative news reports as a rising CPI means rising inflation. The CPI is more important to consumers than the GDP index because the GDP index uses indicators not as important to consumers such as government purchases, foreign trade and capital goods.

The Mortgage Bankers Association (MBA) expects the change in consumer prices to be lower in 2005 and increase in 2006. The Mortgage Bankers association projects the Consumer Price Index (CPI) to lower from 3.6 in Q4 of 2004 to 0.9 in Q2 of 2005. They project them to rise to 2.4 in Q1 of 2006 and level out at 2.2 the last two quarters of 2006.

The MBA would be very interested in the CPI because if inflation increases dramatically the Federal Reserve (Fed) could increase interest rates as part of a tight money policy to control inflation. The MBA forecasts the CPI dipping to 0.9 the upcoming quarter this year which bodes well for the mortgage banking business as low CPI would mean that the Fed would not need to increase the interest rates to slow the increase in prices.

The Congressional Budget Office (CBO) projects the CPI to decrease from 2.7 in 2004 to 2.4 in 2005 and 1.9 in 2006.

The Presidents budget office projects the CPI for decrease from 2.7 in 2004 to 2.4 in 2005 and 2.2 in 2006.

Both the congressional and executive branch forecasts are the same in 2005. The change is in 2006 where the congressional estimates are for lower than the executive branch CPI estimates. 2006 is also an election year for many in congress and lower inflation helps the incumbent. The reasoning behind this is that usually higher prices and inflation are signs of a weak economy and blamed on the current government. Usually challengers in congressional races use a poor economy against the sitting member of congress.

It may be cynical to think that the MBA or CBO would intentionally skew their forecasts to enhance the chances of achieving their desired goals. These differences in the projections may be a result of reading indicators that affect inflation differently. The positive news is that all three agencies projected the CPI, which is a measure of inflation, to lower in the next two years, which is good news for our economy.