Price of paradise picks up pace

High housing and transportation costs get much of the blame

While the high housing and transportation costs that have pushed Hawaii's inflation levels to the top of the nation have begun stabilizing, it could take awhile for consumers to see a corresponding price drop in their overall cost of living.

Honolulu's housing costs and transportation costs declined from the first half of 2006 to the second half of 2006; however, the city's overall consumer price index still jumped 5.9 percent for the year, according to a report released yesterday by the federal Bureau of Labor Statistics.

The rise -- which kamaaina jokingly refer to as the price of paradise -- was the biggest increase recorded of any U.S. city; nationwide the average rate of inflation was 3.2 percent in 2006.

State Economist Pearl Imada Iboshi said although Hawaii has enjoyed a long run-up in real estate appreciation, price increases in other categories have lagged behind. Now that housing and transportation costs have begun to stabilize, inflation has trickled down to cause price increases in food and beverage costs, apparel, recreation, education and communication and other goods and services, she said.

"Because most of the increases that we have had are coming from housing costs, a lot of the increases are just catching up," Imada Iboshi said. "We expected those increases to come sooner, and they are really just coming online now. It may take awhile for the cycle to unwind."

Honolulu didn't see much change in inflation from the first half of 2006 to the second half of 2006, Imada Iboshi said.

Honolulu's CPI rose 5.8 percent in the second half of 2006 from the year-earlier period, matching the year-over-year rise it had in the first half of 2006 compared with the first half of 2005.

However, the full-year number was 5.9 percent because of rounding.

"Among the western cities and metropolitan areas, Honolulu clearly experienced the highest inflation," said Regional Commissioner Richard J. Holden for the Bureau of Labor Statistics in San Francisco.

Los Angeles and Seattle, which were the closest metropolitan areas in the region, didn't even come close to Honolulu's increases, Holden said.

These cities, which also have strong housing markets, came in at 4.3 percent and 3.7 percent, respectively, he said. Honolulu's rate of inflation was even higher than recorded levels in New York, Boston and Atlanta, Holden said.

"Transportation and housing costs had the biggest impact," he said.

Honolulu's high transportation costs dropped from 7.1 percent to 3.8 percent from the first half of 2006 to the second half of the year; however, the numbers are still high as compared to other regions.

For instance, in San Diego, another hot growth city, overall prices rose 3.4 percent in 2006 over the previous year, with a 2.5 percent rise in the transportation index and a 4.1 percent rise in housing.

It was the same story in Phoenix, where overall prices increased 3 percent, with a 1.7 percent rise in the transportation index and a 3.9 percent increase in housing prices.

"Clearly, there was much less of a rise in both of those areas as compared to Honolulu," Holden said.

Honolulu's housing market also has begun to stabilize, but prices are still high enough to push rental costs upward. Based on the general real estate market's performance in 2006, Prudential Locations expects to see single-digit price appreciation for both single- family homes and condominiums, with a continued decline in sales volume in 2007.

"Although prices will fluctuate differently in each specific area on Oahu, solid increases are still expected in high-demand neighborhoods," said Scott Higashi, executive vice president of sales for Prudential Locations.

Prices associated with housing rose 8.4 percent in 2006, with shelter costs rising 9.4 percent and the cost of fuel and utilities rising by 13.1 percent. In the last two years, Honolulu's shelter costs have risen by 15.5 percent as rent prices experienced a 16.3 percent hike.

While Honolulu's high housing costs came down slightly in the second half of 2006, dropping from 8.5 percent in the first half of the year to 8.3 percent in the second half, it wasn't enough to make a significant difference in the rate of inflation, Imada Iboshi said.

"Our housing costs are still the biggest factor in our inflation and we didn't experience an appreciable difference in costs from the first half of the year to the second," she said.

Honolulu's high inflation is a sign that the economy is booming. However, rapid growth has created its own Catch-22 for the state.

If inflation continues to rise along with Hawaii's economic performance, it could cause a strain for consumers since wages have not kept pace with prices, Imada Iboshi said.

"We've only seen slight increases in our personal income," Imada Iboshi said. "Wage increases in most categories aren't keeping up with the rate of inflation. "

On average, hourly wages only increased by about 60 cents to $1 in most categories, she said.

Meanwhile Honolulu's higher costs have spread to other categories. Apparel prices, which dropped 0.8 percent in the first half of 2006, shot up by 4.7 percent in the last half of the year. Recreation costs also rose from 2.4 percent to 4.4 percent.

In the last half of 2006, Hawaii consumers also found that food and beverage costs increased from 3.7 percent to 5.2 percent and that they paid more for education and communication services, which rose from minus 1.3 percent growth in the first half of 2006 to 0.8 percent growth in the second half.

In fact, Hawaii consumers paid a little more for all other goods and services last year. Price growth for all other goods and services rose from 3.4 percent in the first half of the year to 3.5 percent growth in the second half of the year.