Miami's steep rise in consumer prices raises warning flags
By Michael Lewis
It's been so long since inflation threatened Miami that federal figures last week sounded alarms: The Consumer Price Index in South Florida rose 4% in the first half of this year from the same time in 2004.
While 4% seems positively tame compared with 1980's dizzy 13.9% climb, it's been 14 years since a six-month increase here was so high.
Last year, the first-half rise was 2.5%. It was 3% in 2003, 1.3% in 2002.
Economists see these numbers as warning flags - not a warning of disaster, but one of a possible slowdown in South Florida.
Why South Florida in particular? Because, as Tony Villamil, head of the Washington Economics Group, points out, our consumer prices are rising much faster than those of the nation as a whole.
While Greater Miami had a 4% increase through June, nationally, the level was just 2.5%. So Miami, once a low-cost area, now finds its index of 190.7 slightly higher than the US city average of 190.1. Instead of spending less than average to live here, we now spend marginally more.
The 4% rise is a cause for worry, Dr. Villamil says, because it reflects rapid increases in housing costs and the total basket of goods in the price index, showing that Miami is becoming a high cost-of-living city, up there with New York and Los Angeles. It is now, he says, a metropolis - and no place with global glitz and a global economy is a low-cost haven.
Due to that higher cost structure, he predicts, Miami's 4.3% unemployment, its lowest in many years, will go up as rising costs impede business and increase unemployment.
Unfortunately, as we reported last week, the factors that are pushing up our consumer prices are particular hazards to our booming construction industry, in which employment in the past year has risen 2.4%.
Developers who have sold high-rise condos well before construction have been walloped by rapidly rising labor and materials costs they didn't anticipate, carving heavily into profits and sometimes making it uneconomical to build the project.
At the same time, inflation squeezes the spending abilities of ultimate buyers of that housing - who also face the danger that inflation will trigger higher long-term interest rates that could hammer their adjustable-rate mortgages.
If we get hit in the short term on the cost side, notes local economist Manuel Lasaga of StratInfo, and in the long term we get hit in finance rates to consumers, "it could deal an uncomfortable blow in housing," which is a vulnerable sector to trends. "There is a risk to Miami."
Miami's other risk that Dr. Lasaga cites is the erosion of buying power as consumers feel inflation's impact. This, he says, could cost us expansion - not grinding our dynamic economy to a sudden standstill but slowing its energy and lowering growth rates.
Both Dr. Lasaga and Dr. Villamil point to higher energy prices as a villain. Last year, energy as a component of consumer prices rose 16.6% in 12 months nationally. This year, it's already up 14.1% in six months, with rises fueled by the rising price of fuel.
But that's a national phenomenon, and other than the cost of transporting gasoline here, its wholesale price is the same as in the rest of the nation. So what makes consumer costs rise here so much faster than the rest of the US?
Try housing prices.
"Affordable housing doesn't exist," Dr. Villamil says.
Dr. Lasaga agrees that the cost of housing may differentiate us from the average US city.
The cost of getting a roof over your head here is going through the roof.
Our own success also may be costing us more, Dr. Lasaga hints. As Miami's economy strengthens and employment swells, demand rises because more money is flowing, and we'll pay higher prices as a result.
Such creeping inflation is a concern, Dr. Lasaga says, because it hints at problems in the economy
"We may not be out of the woods yet," he says. "There may be more inflationary pressures in the pipeline that we haven't yet felt."
That, he says, puts us at a crossroads. Inflation may slow Miami's jetting economy or, if inflation continues into next year, it may spawn an inflationary cycle.
Locally, we can do precious little to halt creeping prices. We can blame some of the price increases on our own success - and clearly, we don't want to impede business in order to hold down prices.
But we should be wary of inflation's potential impact and remember that low inflation and its companion, low interests rates, don't hang around forever. Building a future on the assumption that low costs and low interest are immutable is a recipe for disaster.