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inflationThe current inflation rate is not worrisome, but is always worth a close look. Any surprise uptick in inflation automatically pushes up mortgage rates.

For all of last year, the broad Consumer Price Index (CPI) rose 1.5 percent. As of March this year, the 12-month inflation rate was also 1.5 percent. The more important “core” inflation rate, as it dictates monetary policy, however, is showing signs of accelerating. After removing the volatile food and energy prices from the basket, core inflation increased at a 2.5 percent annualized rate in March, the highest rate in a year. If the core rate rises at such a pace on a sustained basis or moves even higher, then the Federal Reserve will have no choice but to raise interest rates sooner than its public guidance to date. The new chairperson of the Federal Reserve, Janet Yellen, has indicated that the bond-buying program (commonly referred to as the tapering of quantitative easing) is set to end by the close of this year with the first hike in the short-term federal funds rate likely occurring in the summer of 2015.

Why is core inflation suddenly awakening? One key reason is that housing costs have been rising. Apartment rents grew by 2.9 percent. The murkier but nevertheless important figure of homeowner equivalency rent, rose by 2.6 percent, the highest gain in nearly six years! The continuing fall in apartment vacancy rates combined with a general housing shortage assures even higher rent and homeowner equivalency rent for the remainder of the year.

Though home prices have also been rising quite fast, they are not relevant in the CPI calculations. Like stock market valuation, a house is considered an investment asset by government statisticians and not related to the monthly cost-of-living. However, higher home prices will surely infiltrate into higher monthly housing costs in some way. The NAR median home price rose 9 percent in February. The lagging Case-Shiller index showed a 13 percent higher home price in January.

Against the upward pressure on prices coming from housing, there are potential offsets that could keep inflation in check. First, wage increases have been slowly moving up: from 1.5 percent hourly wage gain in 2012 to 2.1 percent in 2013. As of March, the average hourly wage rate of $20.47 for non-supervisory workers, was up 2.3 percent over 12 months. Still rising, but so far this is nothing alarming. The 20-year average annual wage increase is 3.0 percent. There is, in addition, plenty of slack in the current labor market with many underemployed and unemployed who will be willing to work without a wage increase.