Monday, January 15, 2018

December 2017 CPI

Here are the latest inflation numbers.  We continue in the holding pattern that has been in place for 9 months.  Shelter inflation above 3% and core inflation minus shelter at about 0.7%.

Recent inflation expectations and interest rates have ticked up slightly, but they seem to be in a long term holding pattern too.

Credit seems to be flat or growing very slightly.

So, the very slow motion process continues, and I suppose it is possible that there is enough momentum to stay ahead of rising policy rates for a while.  But, the long end of the curve seems pretty stuck, and I am still watching for the bearish signal of long term yields declining as short to rates rise.

It's all going very slowly - slowly enough that homebuilder stocks have managed to have a decent year.  A long position in long term bonds hasn't done so bad either, and the combination of the two still seems like a reasonable combination to me.  Homebuilders have growth potential if credit markets can grow again, and should also be defensive since the shortage of homes continues to build.  Although, in current terms, I'm not sure there is much of a discount in that sector any more.  Long term yields will eventually fall, and in the off chance that the economy can remain in front of the Fed tractor beam, losses would likely be countered by gains in homebuilder stocks.  This is all the more so because I think we are unlikely to see strong growth without a rejuvenation in mortgage borrowing, which would coincide with rising prices and starts.  But, I think there is a consensus of the damned to prevent that from happening.  So, I continue to be moderately bearish, although I expect my patience will continue to be tried on this issue.

PS: Zillow showed rent inflation subsiding earlier last year, but possibly starting to recover again in December.  With the persistent shortage of housing, I think rent inflation is generally a signal of demand.  When it drops, it will be bearish.  There is chatter about "oversupply" in the Closed Access cities.  It is true that those cities and only a few others have new supply coming on at near the rates of 2005, and according to Zillow, Closed Access rent inflation is currently moderate.  But, in 2005 those cities, collectively, had net domestic migration outflow rates of something like 1.5% of their populations.  A lack of demand, which in this case will be a lack of money or credit, will look like oversupply, and will lead to calls for more contraction of demand in order to pull back building, which will make it appear as if overbuilding caused the contraction.  That will seem to prove that the Fed still needs to tighten earlier in order to stop all of these bubbles.


  1. CPI sans rent at 0.7%. A measurement error from zero. Unit labor costs falling.

  2. What level of housing starts would you consider appropriate to bringing down housing costs? I notice that now we're at about 1.3 million starts per year. I think the housing stock is about 135 million, so I suppose we're in the neighborhood of 1% growth per year. Of course, it's also true that new housing is larger than it used to be, so in terms of square feet added the growth is probably faster. Here is a little chart I made:
    I am wondering what would impact housing averages (not welfare) more: building more in closed access or open access cities. Closed access cities have more room to fall, but units there are on average more expensive.

    Keep up the good work!

    1. I was just at a presentation this morning where 1.5 million was the level purported to be neutral. That seems about right to me. If we settle at a new regime, where fewer households can be buyers, then residential investment will probably be lower going forward, and if the mortgage market is opened up to middle class and young borrowers on the margin again, then I think the market could demand 2 million units per year for many years. In the meantime, it could be that rent inflation would subside somewhat around the 1.5 million level, but the market is strange now because of the shifting equilibrium. I think rents in general are high now because many households live in homes that reflect housing demand of the previous credit market regime, which have a higher market value than the house they would live in under the current regime. So, demand is sort of inflated. I think that eventually, the new regime will be reflected in lower housing consumption, and rents would decline as a percentage of incomes in any case back to long term norms in Open Access cities.

      In a healthy market today, I would like to see building at 2 million units or more and rent inflation well below general inflation. That would reflect a true return to affordability in the Open Access areas.

      On your graph, I think accounting for the over 65 years group would be important, but it doesn't look like there is an easy way to do that at Fred.

      Thanks for the input!

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