Friday, May 12, 2017

April 2017 CPI Inflation


Non-shelter Core CPI, year over year, now down to 0.8%.  Luckily those rent checks that homeowners write to themselves and put in their bank accounts each month are keeping inflation near its target level.*

That's why the Fed needs to raise rates next month, because all that rental income is just causing an avalanche of fixed residential investment.  We need to stamp this thing out before it gets out of hand.

Are we going to get a repeat of 2008, where by the time the Fed meets, 5 year inflation spreads in the TIPS market are back down below 1.5%, and FOMC members will explain to us how we can't really trust market measures?

OK, Wall Street Journal!  Time for one of your well-timed op-eds, explaining how it's the Fed's job to create panics and contractions!  This is your speciality.  It's your time to shine!

* I just had a great idea.  I don't know why I didn't think about this before.  We should have hard price targets for homeowner rents.  The Federal Reserve should send a letter to homeowners each month, directing them to raise or lower their rents.  Then, the Fed can adjust rent inflation so that we precisely hit our inflation target every month!  This will also increase household income!  This seems like the sort of idea that President Trump could get behind.


  1. Scary post.

    Eric Rosengren, Boston Fed President, has been sermonizing on all the construction cranes he sees in Boston, and rising property prices, so he says he must raise rates.

    Evidently it never occurs to him to say, "Obviously, we have to liberalize, or better yet, end property zoning in the Boston area. We have great businesses and people want to live here."

    His solution to rising Boston property values is to suffocate the national economy?

    I hope I am exaggerating. But show me evidence I am.

    1. It's funny how often the reaction to the Closed Access problem is that, well, it's just geography. There just isn't room to build much in these cities. Costs are just going to be high.

      Then, when building gets to even a fraction of what it would take to lower costs, everyone starts running around, "Overbuilding! Overbuilding! It's going to collapse the market!"

      Well, what is it? Is it impossible to build enough in those cities, or do we need to keep kneecapping the market so they don't build too much? It can't be both.

    2. Both.

      I'm renting an apartment in NYC as we speak, and the recent collapse of the market is killing everything.

      So you can't build without excessive rents to justify the insane construction costs(and permits, bribes, Union labor costs,etc), and doing *enough* building causes rents to fall.

      Now of course, the real answer is to eliminate those extra costs, but that doesn't help 626 Flatbush (just to pick one) make $3000/month on a 550 SQ. Ft. 1BR. Which they desperately need to do if they're ever going to pay back their investors.

    3. Exactly. That's why it's so hard to reverse a limited access order. Once it's in place, the stability of the community depends on it. The market equilibrium in these cities is on a knife's edge. This is why I don't think it would be possible to manage this away with 3-4% inflation. It would be difficult to manage the re-opening of a functional market in a way that produced 3-4% annual real losses in an orderly way.
      The change probably has to be enforced from a higher level - state or federal. In a way, this is a lot like the civil rights movement. The south was stuck in a bad local equilibrium, and it took a larger power to break it, because there were too many locals who were hurt in the short term by a regime shift.
      But, you have to be really careful about imposing regime shifts that you know will damage some people. That's what we have been doing since 2007 in mortgage markets, and we were horribly wrong about what was happening. So, we have been damaging people for a decade for no reason. And it's killing us.

      The solution would need to reverse the signals of the problem. That would mean pulling down prices across Closed Access cities, even though that would be disruptive. Instead, we have pulled down low tier prices across cities while Closed Access prices remain high. We have been damaging ourselves to solve a problem that didn't exist. That's the danger. When you implement something, you risk looking pretty nasty in hindsight.

  2. Even most people in the real estate sector don't get it. I've spoken with Philadelphians who have been nervous when 2,000 condo units are under construction in Center City. They worry that the rents or prices on the new units are too high to be supported and things like that. The MSA is 4.5 million people. I'd love to see 20,000 units under construction.