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Komal Sri-Kumar: Housing and "Transitory" Inflation



As the Federal Open Markets Committee meets next week, Chairman Jerome Powell has to decide what to say about the staying power of inflation at his press conference on Wednesday. There is little to suggest that he will deviate significantly from his past statements that the large price increases of recent months are temporary and largely due to supply bottlenecks.

There are flies in the Federal Reserve's ointment arising mainly from the role played by rents on leased property. First is the role played by rents and owner-equivalent rents – the latter in the case of homes owned by occupants. Typically, monthly payments for rental space tend to lag increases in commodity prices which are quicker to adjust to changes in supply and demand. Rents are more sticky and change only at the start of a new lease period.

Consequently, the increase in the rental component of the consumer price index as the economy recovers has been nowhere close to the 14.9% rise that the Case Shiller 20-city home price index recorded for the latest month. And the divergence between rents and home prices has widened since the start of covid.

Second, an examination of the components of the CPI shows that the pace of increase of the rental component has been steadily increasing since the start of 2021. The rise over the previous year was 2.34% in June compared with 2.01% in January. With owner-equivalent rent having about a one-quarter weight in the CPI, further hikes upon renegotiation of contracts could cause overall inflation to surge, especially as continuing supply bottlenecks keep the other parts of the price index rising sharply.

Third, a ban on evictions ordered by the Center for Disease Control and Prevention (CDC) to stem the spread of covid ends on July 31 – just a few days after the Fed meets. Even though some individual states will continue the ban, expect evictions nationwide to increase followed by a hike in rents. Higher rents will put paid to the Powell argument that the inflation pickup is occurring due to supply bottlenecks.

Of course, what keeps inflationary expectations alive are the continuation of the central bank's monthly bond purchases of $120 billion and near-zero, covid-level interest rates despite a recovering economy. Unfortunately, not even a Presidential pat on the back will stengthen the Chairman's ability to keep inflation "transitory". President Biden said Wednesday on CNN that "it's highly unlikely that it's going to be long-term inflation that's going to get out of hand".

Presidential action to jawbone inflation down is nothing new. Upon inheriting both the presidency and rapid price increases in 1974, Gerald Ford tried a new tactic. His administration introduced a "Whip Inflation Now" effort to curb spending even as a pliant Federal Reserve increased money supply sharply to help meet the cost of the Viet Nam war.

President Ford's program boosted sales of WIN buttons and T-shirts, but it also led to a severe recession and even higher prices.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California


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Posted: July 25, 2021 Sunday 02:24 AM