The local inflation in the state of California is racing higher and quicker in the last decade and we could blame the price gasoline for that, but housing costs in the state are largely to blame.
At the national level, the consumer prices are barely moving, and inflation is chocking, reaching 1.8% in May last year. However, for the Californians, inflation is a different case.
According to the U.S. Bureau of Labor Statistics, there are multiple Californian metropolitan areas that saw the biggest jump in the Consumer price index (CPI) in May. San Diego recorded the highest jump, with inflation over the past year reaching 3.8%, followed by Los Angeles and the Orange Counties, where consumer prices rose 3.1%.
Inland Empire counties of San Bernardino and Riverside, the inflation index swarmed up to reach 2.9%. The San Francisco Bay Area saw consumer prices reaching 4%.
“Housing has a huge weight in the index,” said Lynn Reaser, chief economist of the Fermanian Business and Economic Institute at Point Loma Nazarene University in San Diego. “The problem is we are not building houses rapidly enough to accommodate the increase in demand.”
The Demand-Supply Chain
Part of these high inflation rates in the major metros of California are heightened by the supply of housing in the county.
To understand these statistics better, we have to understand the demand-supply chain. Most people are coming into the state from neighboring states, but, the supply side is torpefied.
However, much as we want to blame housing costs for inflation, there are unique factors that have made the situation in California worsen, from the shape of the coastline to prop 13, all of which have attached a fairly expensive price tag to the Californian dream.
Simply put, the state hasn’t built enough homes to keep up with the ever-growing demand. Is rent control a good or a bad thing? What about the effect of the NIMBYs on the supply chain?
All of these are issues we need to illuminate as far as the housing prices are concerned. However, one thing we can all agree on is that over the past few decades, California hasn’t been building enough houses to keep up with the demand.
Even when the construction was booming in the mid-2000s, new homes weren’t being built in the coastal cities where many people now work. While construction in places like the Inland Empire and the Central Valley crazed, places like L.A and San Francisco flatlined which explains the variations in the inflation rates.
Tight Labor Market
The demand for housing stems from a growing economy. The fact that these metros experience high inflation rates is a reflection that the economic activities in these areas are robust, putting upward pressure on the prices.
The mandated minimum-wage increases and the tight labor market are also putting pressure on the employers to pay higher wages too, to counter, they are passing at least some of that pressure along to the consumers. California’s economy in April last year saw a forward surge, as employers added 46,000 net jobs as the unemployment rates held steady at 4.3%.
Wage growth has also been growing, with the average hourly earnings growing by 5.2% in April. The average hourly earnings in Los Angeles and the orange Counties rose 7% from a year earlier, reaching $31.60. In the Inland Empire, wages grew 6.2%, while in San Diego County, the wages were essentially flat.
Rising prices of gasoline among other consumer prices rose. The index of the L.A-O.C gasoline pump prices rose at an 18% yearly pace in April, which is the biggest jump since November 2011, forcing drivers to pay more, largely due to the surging crude oil prices, and the new state gasoline tax.
Overall, according to the data from the Bureau of Labor Statistics, the inflation rates in L.A and Orange Counties moderated since 2018, where the annual average in the consumer prices was 3.8%.
There were several high-profile bills that died in 2019 among them is Senate Bill 50, which would have allowed at least four units of parcels in most single-family neighborhoods across the state.
An increase in the CPI can have far-reaching consequences for the renters in rent-controlled buildings, as cities tend to peg allowably increased to the inflation measures.