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Factors affecting Southern California inflation

Southern California’s inflation rate has doubled the pace of the last several years of increasing consumer prices.

In February and March this year, the consumer price index for the region reflected a 2.7% annual rate increase.  Considering the 3.1% increase in January 2016, local inflation hasn’t been this strong since November of 2011.  The inflation rate for the five-county region averaged 1.45% between 2012 and 2016.

Two of the biggest factors influencing March’s higher consumer price index are:

  • 5% increase in rental costs compared to the previous year. This was the seventh consecutive increase beyond 5%, which last occurred in 2007-2008.
  • 12.1% increase in gas prices.

Higher cost of services

One significant factor spurring higher inflation is the increasing cost of services throughout the region.  Annual rates in labor-intensive industries are currently on an upward momentum.  Medical care costs for example, increased by 4.3% (although pricing for healthcare can always be difficult to interpret). Costs for miscellaneous personal services, such as tax accounting and laundry for example increased by 3.7%.

Another related factor is food-away-from-home pricing, which is up by 3.8%, while food-at-home costs are down by 1.2%.  This discrepancy has existed now for over a year.  One of the reasons for this is staffing expenses, which affects labor shortages or minimum wage hikes, creating financial challenges for establishment owners and also increase menu prices.

Effect on real estate

Mortgage rates have increased as many investors are taking into account the Trump administration’s promised tax cuts and new infrastructure spending, which could potentially lead to higher inflation.

Despite strong sales this year, the price increases may eventually start to dwindle especially if mortgage rates continue to rise.

The median price for Southern California properties for example, dropped to 3.2% from December of 2016, despite being higher in the previous year.  It reached $465,000 in June which was at a nine year high at the time.

This decrease could mean the market is reaching its peak.  In recent years, home prices have outpaced incomes  according to the California Association of Realtors, only 31% of California residents are able to afford a median-price property in the state.  The recent dip may also be attributed simply to normal seasonal fluctuations, as there is typically reduced demand during the fall and winter months.

Average earnings are rising

For the past four years, average earnings in California have been rising at a 2.33% annual rate to $1,010 per week in May.  This increase topped the 1.88% annual increases recorded in the four previous years, during early stages of recovery.

Weekly average earnings on a national level increased at a 2.38% annual rate to $892 against hikes of 2.32% annually in the four previous years.  The national consumer price index increased at a 1.29% annual rate for 48 months, which ended in May, down by 2.22% from the four previous years.

Wage hikes in California translated to increased pay, beating inflation over the four previous years by an average of 1% annually which is a contrast to raises following inflation by 0.34% annually from 2009 to 2013.