Tuesday, October 25, 2016

September 2016 Inflation

Sorry I'm a little late on this.

Trends continue.  The housing shortage continues to push rents up and the money shortage continues to push other inflation down.

First is the month-over-month graph.

Then is the trailing 12 months graph.

Notice on the monthly graph that the trend outside of shelter is down.  Now, trailing 12 month non-shelter core CPI is at 1.4%.  In the last 7 months, non-shelter prices are up 0.45%.  In the 5 months before that, prices rose by 0.95%.  In other words, annual inflation outside of shelter is unlikely to rise back up above 1.5% for quite a while.  It is probably more likely that it will move below 1%.

Forward inflation expectations implied by TIPS bonds have been moving up from low levels, but those are based on total inflation, which includes shelter.  Core CPI is above 2% now when shelter is included.  Five year forward breakeven inflation is under 1.6%.

Let's hope the hawks can be overcome quickly when this comes to a head.  Our perpetual recession is its own sort of macro-prudence, I guess, so we've got that going for us.

It will be interesting to see what happens.  If rent inflation continues to rise, it might encourage the hawks.  On the other hand, if rent inflation falls under these supply conditions, that is a really bearish signal (like in 2007).  I would take it as a signal of a potentially more severe contraction.

At the risk of sounding vain, I wish I could have gotten the book finished and in front of some faces 6 months ago.  A public conversation about this would be useful.

11 comments:

  1. I continue to be puzzled by this notion that you can simply strip out one piece of "inflation." With 100% certainty, if my rent were lower i'd spend more on other things thus pushing up inflation in those areas. No way to know if that'd be more or less inflationary overall but they are most certainly interconnected.

    I'm pretty sure in any inflationary episode in the past you could have pulled out a few problems areas and pointed to "supply issues." That's exactly where inflation occurs...almost by definition.

    ReplyDelete
    Replies
    1. Most rent is imputed to owner-occupiers. So, it requires no cash and has little effect on the rate of other cash transactions.

      Delete
    2. I think "most" is a stretch. Isn't the ownership rate like 60%. Plus we already have political backlash from wealth inequality around the world. Keep letting rent run hot and you keep widening the wealth gap. It's essentially a regressive tax...and today's political climate is not friendly to regressive taxes.

      Delete
    3. You don't have to guess. You can look it up!
      I want rent inflation to come down, which will only happen with new supply. It's complicated.

      Delete
    4. I want new supply too. Why implement a "regressive tax" to make it happen? Why not do some combination of rent subsidies (perhaps a write-off) and the tearing down of zoning restrictions?

      Delete
    5. There is a developed monetary system of low levels of inflation in the 2%-3% range that seems to work in the current economic context. I just want us to do that right. Obviously supply side reforms in housing are very important. I have a long series on housing that you can review in the archived posts at the right margin regarding these issues.

      Delete
  2. If we switched to NGDP targeting, then imputed rent would not be considered, right? Just dollars spent on newly constructed homes?

    ReplyDelete
    Replies
    1. Technically, NGDP targeting doesn't solve this problem. Housing consumption is still included. It is diluted somewhat - maybe 10% of total spending. So, the dilution helps minimize the problem. And the focus on total spending instead of inflation also kind of minimizing the problem. But, it is still there.

      It would be possible to target a different measure of national production that didn't include imputations.

      Delete
  3. In other words, annual inflation outside of shelter is unlikely to rise back up above 1.5% for quite a while. It is probably more likely that it will move below 1%.--Kevin

    Important, great post.

    Could you do this post but with the PCE? The Fed uses the PCE.

    ReplyDelete
    Replies
    1. Yes. I think the PCE data is a little harder to put together. I need to set up a spreadsheet. Housing is a smaller portion of PCE, so it has a slightly smaller effect on PCEPI than on CPI.

      Here's a Fred graph:
      https://fred.stlouisfed.org/graph/?g=7Ylt

      You can see that, when shelter inflation is high, it pulls core CPI up higher than core PCEPI. Core PCEPI is about 1.6% now. Without shelter it would be at or below the non-shelter core CPI, I think. So, it's basically giving the same signal as CPI. But, yeah, I should probably put the spreadsheet together to follow it with more detail.

      Delete
  4. good post, Kevin

    another mechanism by which better housing supply policy might drive up non-housing inflation is the scarcity of construction labor. restaurant and landscaping staff might become pricier

    ReplyDelete