By Tom McClellan – McClellan Market Report
Ben Bernanke gave testimony to committees of each house of Congress last week, and reiterated that the Fed’s long term goal is for an inflation rate of 2%. Saying it another way, Bernanke hopes to confiscate 2% of the value of your money every year. But we digress.
If you look at the most recent data for the Consumer Price Index (CPI), then the inflation rate for “all items” is getting close to that 2% number. But the “core” rate, which excludes food and energy, is up only 0.9% from a year ago, which leads the Fed’s thinkers to conclude that there is still room for their easy money policy.
In calculating the CPI, food and beverages only account for 14.8% of the weighting, and “motor fuel” is only 5.1% (information from bls.gov). So taking them out does not really gut the whole index. But what it does do is overweight other things in the calculations, things like housing which is 41.5% of CPI.
Not many people know that the BLS produces a whole variety of permutations of CPI, including or excluding this or that, plus regional versions. A couple of the more interesting ones are shown in the middle chart, and we never hear people talking about these. The “all items less shelter” series takes out housing, thereby giving greater weight to food, energy, medical care, apparel, etc. It is at a 2.1% growth rate already. The CPI-Housing series, on the other hand, is still near zero, thanks to the continued excess supply following the housing market collapse that is keeping prices down. So whereas some economists do not want to get confused by one-time events like Libya and Egypt that affect oil prices, they are happy to allow artificially low housing prices to remain in the data, and lead everyone to believe that inflation is not a problem.
Based on our research, inflation is getting ready to be a much bigger problem than Fed officials may realize. The bottom chart looks at the CPI-Housing inflation rate, and we also include the plot of lumber prices in this chart. The lumber data are shifted forward by 18 months to reveal how the housing portion of the CPI tends to echo the movements of lumber prices.
The past two years have seen a big rebound in lumber prices from their all-time low in January 2009. The CPI-Housing inflation rate is just getting started on replicating that price climb, and has several months of upward movement ahead. Remember that housing prices make up 41.5% of the calculation of the CPI, so any significant rise will have a huge effect on the headline inflation numbers. We do not believe that Bernanke gets this concept, based on the public statements he has made. He still seems to believe that he has time remaining before he needs to act to prevent inflation, when in reality there is already a good dose of inflation that is in the pipeline and getting ready to reveal itself.
Lumber prices in the last year, or so, have been driven by China activity and anticipated inflation through QE, and somebody has to build these houses first with higher lumber prices to feed into housing CPI. However, anticipated inflation via QE may play for some time …
while 2% inflation seems to be a possible sign of an expanding economy…..i do not think an expanding economy is the RESULT of 2% inflation.
Cullen,
Strictly speaking, it’s not housing prices, it’s equivalent rent. Do you really think it will go up noticeably this or next year?
Not my piece. I am not bullish on housing….
CPI is the least representative of current inflation, and the least predictive of future inflation, out of the basket of inflation indicators widely reviewed.
I love stuff like this – it’s based on, well, not much. Can house prices rise if nobody has the money to buy houses? Hard to see.
Fundamentals in housing are still atrocious. It’s hard to see a bullish scenario playing out. I am still forecasting further declines and then a sideways market for years….
Housing is 41.5% of CPI and yes its still a mess. If it is believable I think that we still do not have the full picture on how bad it is. BB does. I know of people living in houses for one year or more with out making any payments. The real owners bankrupt and are gone, the banks are traumatized to put some of those houses on the market since they would have to adjust those assets downward accordingly in there books. Its not a pretty situation.
Often assets such as boats and cars are also attached to those houses mortgage. If you are to purchase a condo you may end up with huge fees since all your sharing neighbors have left.
However if one is a very careful and patient buyer it may be the best time to buy.
Back when they were (over)building new homes, forward lumber prices may have had s basis to be correlated with CPI Housing. But with new starts bumping along the bottom, existing home sales assume an even larger weight in determining overall prices. And those existing home prices are still declining. Even if lumber prices continue to rise, the ability of builders to pass that cost increase along to buyers is just not there in this market. I really don’t see much threat of inflation coming from the housing sector in the near future.
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© 2009 pragcap.com · Register for PC
By Tom McClellan – McClellan Market Report
Ben Bernanke gave testimony to committees of each house of Congress last week, and reiterated that the Fed’s long term goal is for an inflation rate of 2%. Saying it another way, Bernanke hopes to confiscate 2% of the value of your money every year. But we digress.
If you look at the most recent data for the Consumer Price Index (CPI), then the inflation rate for “all items” is getting close to that 2% number. But the “core” rate, which excludes food and energy, is up only 0.9% from a year ago, which leads the Fed’s thinkers to conclude that there is still room for their easy money policy.
In calculating the CPI, food and beverages only account for 14.8% of the weighting, and “motor fuel” is only 5.1% (information from bls.gov). So taking them out does not really gut the whole index. But what it does do is overweight other things in the calculations, things like housing which is 41.5% of CPI.
Not many people know that the BLS produces a whole variety of permutations of CPI, including or excluding this or that, plus regional versions. A couple of the more interesting ones are shown in the middle chart, and we never hear people talking about these. The “all items less shelter” series takes out housing, thereby giving greater weight to food, energy, medical care, apparel, etc. It is at a 2.1% growth rate already. The CPI-Housing series, on the other hand, is still near zero, thanks to the continued excess supply following the housing market collapse that is keeping prices down. So whereas some economists do not want to get confused by one-time events like Libya and Egypt that affect oil prices, they are happy to allow artificially low housing prices to remain in the data, and lead everyone to believe that inflation is not a problem.
Based on our research, inflation is getting ready to be a much bigger problem than Fed officials may realize. The bottom chart looks at the CPI-Housing inflation rate, and we also include the plot of lumber prices in this chart. The lumber data are shifted forward by 18 months to reveal how the housing portion of the CPI tends to echo the movements of lumber prices.
The past two years have seen a big rebound in lumber prices from their all-time low in January 2009. The CPI-Housing inflation rate is just getting started on replicating that price climb, and has several months of upward movement ahead. Remember that housing prices make up 41.5% of the calculation of the CPI, so any significant rise will have a huge effect on the headline inflation numbers. We do not believe that Bernanke gets this concept, based on the public statements he has made. He still seems to believe that he has time remaining before he needs to act to prevent inflation, when in reality there is already a good dose of inflation that is in the pipeline and getting ready to reveal itself.
Lumber prices in the last year, or so, have been driven by China activity and anticipated inflation through QE, and somebody has to build these houses first with higher lumber prices to feed into housing CPI. However, anticipated inflation via QE may play for some time …
while 2% inflation seems to be a possible sign of an expanding economy…..i do not think an expanding economy is the RESULT of 2% inflation.
Cullen,
Strictly speaking, it’s not housing prices, it’s equivalent rent. Do you really think it will go up noticeably this or next year?
Not my piece. I am not bullish on housing….
CPI is the least representative of current inflation, and the least predictive of future inflation, out of the basket of inflation indicators widely reviewed.
I love stuff like this – it’s based on, well, not much. Can house prices rise if nobody has the money to buy houses? Hard to see.
Fundamentals in housing are still atrocious. It’s hard to see a bullish scenario playing out. I am still forecasting further declines and then a sideways market for years….
Housing is 41.5% of CPI and yes its still a mess. If it is believable I think that we still do not have the full picture on how bad it is. BB does. I know of people living in houses for one year or more with out making any payments. The real owners bankrupt and are gone, the banks are traumatized to put some of those houses on the market since they would have to adjust those assets downward accordingly in there books. Its not a pretty situation.
Often assets such as boats and cars are also attached to those houses mortgage. If you are to purchase a condo you may end up with huge fees since all your sharing neighbors have left.
However if one is a very careful and patient buyer it may be the best time to buy.
Back when they were (over)building new homes, forward lumber prices may have had s basis to be correlated with CPI Housing. But with new starts bumping along the bottom, existing home sales assume an even larger weight in determining overall prices. And those existing home prices are still declining. Even if lumber prices continue to rise, the ability of builders to pass that cost increase along to buyers is just not there in this market. I really don’t see much threat of inflation coming from the housing sector in the near future.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
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