Thursday, October 15, 2015

September 2015 CPI Inflation

Here are updates on Core CPI inflation and Shelter CPI inflation.  Trends continue.  Shelter inflation continues to increase above 3% YOY and Core minus Shelter inflation continues to move along at about 1% YOY.  Some of the drop in energy prices might have filtered into core inflation, but we can see here that Core minus Shelter inflation was only at 1.35% when oil began to drop, and Core minus Shelter inflation hadn't been above that level since early 2013.

This week, expectations of a Fed rate hike have moved back from the December meeting toward the March meeting.  That would be helpful, given that outside of the rent inflation caused by the housing supply depression inflation continues to be at a 50 year low.

Some of the developments that might lead to more housing supply may also lead to higher spending in general, so that positive developments in housing supply may be temporarily associated with both high home price appreciation and high rent inflation.  I think that eventually, accommodative monetary, regulatory, or credit policies would each lead to declining rent and home price appreciation.  But, the potential lag, and a general lack of appreciation of this problem will make policy and prices going forward an interesting show, with several possible paths.

In the meantime, considering the decade long depression-level behavior of housing starts, calls for monetary contraction because of inflation that is largely the product of rising rents are indefensible.

9 comments:

  1. I don't understand your point of view. Take my example, I live in NYC. Yes, I pay more in rent than I used to. But part of what has enabled that is disinflation in other areas of my life. So many goods and services have prices which lag my income growth - alas I am comfortable spending more on rent. So yes, should supply eventually catch up - yes, and I believe it will. But isn't that the case in ANY area where you are seeing inflation? By definition it is temporary (the cure for high prices is high prices). If my rent were to fall that would free up discretionary income that I would spend elsewhere - thus causing inflation there (and causing people to bemoan some "supply constraint").

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    1. If there was more housing supply, rent would be lower, and you would live in a better unit. You would consume more housing in real terms. To the extent that you didn't increase your housing consumption, you would consume more non-housing goods in real terms. We don't live in a fixed pie world. There might be some contexts where some of your other consumption would be inflationary, but real production would rise also.

      Another way to look at it is that your landlord now gets more of your income because there is limited competition for housing in NYC, so you have less real income and your landlord has more real income. So, even if you conceive of national production as a fixed pie, your landlord is getting more of that pie because your rent is too high.

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    2. Hmm. Isn't that always the truth?

      If there is health inflation - we should lower the barriers to health services then I could consume more. If there is energy inflation - we should lower the barriers to oil production then I could consume more.

      Just because there is inflation somewhere doesn't mean it is inefficient. In fact with an inflation targeting central bank there will ALWAYS be inflation somewhere. And by your logic that area will look unproductive.

      If you are making the case that housing is unproductive I think you have to make it on other grounds.

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    3. You are correct that inflation generally reflects monetary expansion and is not necessarily a sign of inefficiency. In the case of housing, that is not the case. I have a long series of posts over the past 9 months laying out why. Excess rent inflation is not a monetary phenomenon. It is a transfer from wage earners to landlords due to regulatory barriers to housing supply in valuable locations - especially San Francisco and New York City. Ironically, even proponents of the bubble narrative like Robert Shiller base their mistaken notion that home prices have been irrationally high on the idea that rent inflation and home prices in the long term will not exceed general inflation levels. They are right in theory, but wrong in practice, because our cities have been populated with residential obstructionists.

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  2. This is the best explanation for low real rates:

    http://bankunderground.co.uk/2015/07/28/drivers-of-long-term-global-interest-rates-can-changes-in-desired-savings-and-investment-explain-the-fall/

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    1. I agree with all of that, as far as it goes. Before I came upon the housing supply issue, I also attributed the decline to demographics and global capital flows. And, I agree that those factors probably lower real rates, slightly. But, I have come to the conclusion that housing constraints underlie all of these issues. Before the crisis, severe limits to housing in the most productive cities were limiting outlets for real investment and were creating economic rents for workers, firms, and real estate owners in those cities, exacerbating the issue. But, the housing problem and the collapse in real rates exploded after the bust. The fall in real rates since 2007 has been extreme, and this is mostly due to the collapse, in both real and nominal terms, of US real estate. There are tens of trillions of dollars in missing capital, both because home prices are too low and out of competitive equilibrium and because there are millions of homes which should have been built, but weren't. There really shouldn't be any mystery about why there has been a dearth of investment since 2007.

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  3. http://nreionline.com/multifamily/don-t-expect-multifamily-rents-alone-catalyze-higher-inflation

    The above suggests so much housing is being built that shelter costs will stop rising. I wonder.

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    1. Thanks Benjamin. That's a very well written article. I like their approach. But, I agree, their rent expectations seem a little optimistic, which is confirmed by the 4 months of data since the article was published. I think the question is, short of another deflationary disaster, how long will it take for rent inflation to reach 4%?

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  4. I suspect shelter costs inflate in good times. Duh. Supply is constrained.

    So...we can do away with good times...or live with 3% inflation...

    Or get Brooklyn and Newport Beach to allow the market to determine supply....

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