via Mike Shedlock
The Case-Shiller national home price index hit a new high in February. That’s the latest data. Economists don’t count this as inflation.
Chart Notes
- National and 10-City Case-Shiller home prices hit new record highs in February
- OER, CPI, and Rent are indexes measured by the Bureau of Labor Statistics (BLS).
- OER stands for Owners’ Equivalent Rent. It’s the price one would pay to rent one’s own house unfurnished and without utilities.
Case-Shiller measures repeat sales of the same home over time and the indexes attempt to weed out major home improvements.
Case-Shiller is a far better measure of home prices than median or average prices which do not factor in the number of rooms, location, lot size, or amenities.
Not Inflation?!
Economists, including the Fed, consider homes a capital expense, not a consumer expense.
As a result, they all ignore economic bubbles and blatantly obvious inflation on grounds it’s not consumer inflation. This has gotten the Fed into trouble at least three times. The first was the dot-com bubble, then the Great Recession housing bubble and now.
It’s really pathetic when you make the same major mistake over and over and over. It’s a result of group think.
They all believe in the same silly models based on disproved theories including inflation expectations and the Phillips curve. You do not get in the good ole boys Fed club unless you think like a good ole boy.
Inflation Expectations
Fed Chair Jerome Powell mentions inflation expectations at every meeting. So did former Chairs Janet Yellen and Ben Bernanke.
In my post How Do Inflation Expectations Impact Wages and Future Consumer Inflation? I explain why inflation expectations are irrelevant to future inflation.
Moreover, two Fed studies agree.
One of the Fed studies debunking the theory cited Mark Twain The Tragedy of Pudd’nhead Wilson (1894) “Few things are harder to put up with than the annoyance of a good example” and John Kenneth Galbraith (1958) “It is far, far better and much safer to have a firm anchor in nonsense than to put out on the troubled seas of thought.”
The Fed consists of a bunch of groupthink wizards who believe in inflation expectations and don’t believe home prices constitute inflation.
They do not understand that inflation matters, so the only thing they look at is consumer inflation.
As a direct result of not understanding the importance of asset bubbles the Fed is in a big mess: The Fed’s Big Problem, There Are Two Economies But Only One Interest Rate
When the Fed slashed interest rates to zero, mortgage rates fell below 3.0% for an extended period allowing everyone to refinance at 3.0 percent or below. Most did.
Whereas the renter is struggling, the homeowner refinanced lower putting extra money in his pocket every month.
Winners and Losers
- The homeowners are generally doing OK. The home ownership rate is 65.7 percent.
- The 34.3 percent who rent are generally not doing OK.
Those renting and looking to buy a home are very angry at rent prices up at least 0.4 percent for 31 straight months while home prices are the least affordable in history.
No one wants to trade a 3.0 percent mortgage for a 7.5 percent mortgage so the housing market is essentially locked up.
There is no solution to this self-made Fed problem. The Fed has never admitted it created this mess or any mess.
“Lack of Progress” on Inflation
My understatement of the day is The Fed Notes “Lack of Progress” on Inflation
While I blame the Fed for its total unawareness of housing bubbles and failure to figure out that three massive rounds of fiscal stimulus would cause inflation, Congress and President Biden deserve a huge share of the blame as well.
Biden’s regulatory madness and EV push is highly inflationary and so are budget deficits sponsored by Democrats and Republicans alike.