Two more factors have emerged that add to the Fed’s inflation concerns

Two more factors have emerged that add to the Fed's inflation concerns

A home available for sale is shown on August 12, 2021 in Houston, Texas.

Brandon Bell | Getty Images

Home price trends and consumer expectations that were part of the data release on Tuesday indicated that more inflation-related issues are on the horizon for the US economy.

The S & P / Case-Shiller Index, which measures house prices in 20 major US cities, rose 1.77% in June, gaining 19.1% year-on-year. It is the biggest jump in the history of the series since 1987.

By way of perspective, the largest annual price increase before the subprime recession and the 2008 financial crisis was a 14.4% increase in September 2005.

At the same time, the Conference Board reported that consumer inflation expectations had risen again, with survey respondents now applying the measure in 12 months to 6.8%. This is an increase of 17.2% in absolute or relative percentage points from a year ago.

Both measures sent important warning signals: Housing costs are a large part of most inflation indicators – around a third of the consumer price index and even more key readings, for example. – while inflation expectations are considered a leading indicator. This is how the high pressure on prices will play out.

Former Treasury Secretary and Obama’s White House Economic Advisor Larry Summers recently said, “Whenever you hear that inflation is temporary, remember that double inflation in house prices has not yet appeared in the index. The core housing CPI represents 40 percent of the Tweet.

The latest inflation-related readings come just days after a vigorous effort by Federal Reserve Chairman Jerome Powell to allay concerns over price pressure. Summers has been one of the loudest voices warning against inflation, but they are starting to rise within the Fed and other economists.

An article published on the Dallas Fed website last week dealt specifically with housing costs.

Economists Xiaoqing Zhou and Jim Dolmas wrote that rising house prices are generally a leading indicator of rents, accounting for most of the housing costs in CPI calculations. The correlation, he said, takes a hit with a lag of around 18 months, meaning that rising housing costs now promise a heavy rent burden in the years to come.

Ultimately, they see a steady increase in rents and the nominal rent of landlords, both of which are expected to increase by 6.9% by 2023. That would add up to around 0.6% for headline inflation as measured by the overall price index of personal consumption expenditure, the Fed’s favorite. Gauge.

Wall Street backs the Fed, even if Main Street doesn’t

Still, many Wall Street economists believe the Fed is correct in predicting that inflation will subside due to temporary factors such as supply chain disruptions and shortages of goods and labor.

“We think [inflation] Expectations are high and are expected to decline over the next few months as lower oil prices will impact retail gas prices, ”wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Indeed, economists link consumer inflation expectations to volatile issues like prices at the pump, which have fallen a few cents in recent weeks but are up 41% from a year ago, according to the Energy Information Administration.

However, it’s not just energy, and it’s not just moms and consumers who are constantly bracing for price increases.

Goldman Sachs said a composite used by the company that examines seven measures of corporate inflation expectations reached the highest level in two decades that the company has been tracking them.

In addition, corporate pricing announcements are at their highest level since 2011, and Russell mentioned “inflation” among 3,000 companies at their peak in a data series dating back to the same year, economists said. of the Wall Street firm. .

Yet Goldman is also in the camp of transient inflation, predicting that for long-lived “durable” goods that have increased during the pandemic, shelter-related price increases will offset and offset the increase. Goldman forecasts a decline in core PCE inflation from 3.8% in 2021 to 2% by 2023-24, in line with the Fed’s long-term target.

Not everyone is convinced that the current pressures will give way so quickly.

The market will have a good look on Friday when the Labor Department releases its report on non-farm payrolls along with readings on average hourly earnings. Wage and price inflation is what scares the Fed the most, and there are fears that the central bank is becoming too complacent about various factors that could fuel “bad” inflation.

“Energy, food and rent are the most visible forms of inflation,” wrote Joseph Kalish, chief global macroeconomics strategist at Ned Davis Research. “My biggest fear is that complacency is a cause for concern and that low interest rates suddenly rise, triggering a reaction from Fed officials.”

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