Tuesday, June 12, 2018

May 2018 CPI

More of the same this month.  I think this month might accelerate the slow motion train wreck, because it is being widely reported as accelerating inflation.  But, non-shelter core prices really haven't risen at all since February.  The only reasons year-over-year core CPI inflation has risen to 2.2% are (1) shelter inflation is at 3.5% and (2) the three months that just fell off the back end of the year-over-year range had cumulative deflation of non-shelter core CPI of 0.34%.  So, three months which had cumulative inflation of 0.02% caused the non-shelter core inflation rate to rise from 0.9% to 1.3%.  And shelter inflation adds the other 0.9%.

This will add confidence for maintaining an aggressive schedule of rate hikes.  Households are already into the territory where rent expense is taking a larger portion of personal budgets than is normal.  That suggests that consumption of shelter is already into inelastic territory, so that there won't be a cyclical reduction in shelter consumption.  That suggests to me that shelter inflation will remain high if the Fed overtightens, which will continue to push them to tighten more.

In today's context, I'm not sure that non-shelter inflation at 0.5% or even 0% leads to any sort of acute crisis.  But, it seems like that is where the risk lies.  One problem is that the obsessions and biases that developed during the housing bubble led to a canonized belief that the net effect of rising mortgage levels, home prices, and housing starts is consumer inflation.  But, that is wrong.  To the extent that consumption was fueled by mortgage credit, the source was rising rents in Closed Access cities where housing starts are persistently low, and Closed Access homeowners were spending some of their capitalized future rental income.  Except for the foreclosure crisis in 2008-2011, 2005 was the only time in the last 20 years when rent inflation finally reverted back to general inflation.  The housing boom was moderating inflation.  Closed Access homeowners were spending from their ill-gotten rentier profits, but the Fed is perfectly capable of countering that - and they were throughout the boom, with unusually low currency growth.  The Fed could do that today too, and obviously would, given the general hawkish atmosphere.  But, in the meantime, ironically, the first order effect of opening the floodgates on housing credit markets would be significant disinflation because of falling rent.


  1. The problem with isolating housing is that it influences the other components. Increased rent transfers money from those with high propensity to consume to landlords (lower propensity to consume on average). This dampens the other components of CPI. There is no way to know what the CPI would be if rents fell.

    1. I am a little lazy with this, because the CPI less shelter, food, and energy is such an easy number to grab from the BLS. But, most of the shelter component is imputed rents of owner-occupiers. This is an important reason why I consider non-shelter inflation to be a better measure of monetary policy. It actually doesn't transfer money to anyone. There isn't a cash transaction at all. It doesn't affect other spending.

      Now, if I was being careful, I would account for the small part of shelter inflation that is rent from tenants, but it doesn't change the numbers much.

  2. Another great post.

    Yes, if somebody asked me how to fight inflation in the US, I would say build a lot of housing.

    I read about supply and demand in college.

    The Fed and the orthodox economics profession has a different solution to fighting inflation: Suffocate demand.

    I think my solution is better.

  3. OT.

    "Leading today’s Hong Kong real estate news, locals lucky enough to buy a new home will soon be spending an average of 7o percent of their monthly income on mortgage repayment, up from the previous 60 percent as mortgage rates rise,"---Mingtiandi.


    Curiously, Hong Kong is often presented as a paragon of free trade and free enterprise.

    Really? Free trade and enterprise lead to soul-crushing housing costs?