Two extra components have popped up that add to the Fed’s inflation worries

0
25

A home for sale will be on display in Houston, Texas on August 12, 2021.

Brandon Bell | Getty Images

Trends in house prices and consumer expectations, which were part of Tuesday’s data release, pointed to further inflation problems for the US economy.

The S&P / Case-Shiller Index, which measures home prices in 20 major US cities, rose 1.77% in June, up an astonishing 19.1% year-over-year. It’s the biggest jump in the series history since 1987.

In perspective, the largest annual price gain before the subprime crisis and the 2008 financial crisis was the 14.4% increase in September 2005.

At the same time, The Conference Board reported that consumer inflation expectations have risen again, with respondents now seeing the metric at 6.8% in 12 months. That’s a full percentage point more than a year ago, or 17.2% on a relative basis.

Both of these metrics have been important warning signals: Housing costs make up an oversized chunk of most inflation indicators – around a third of the consumer price index and even more of the core values ​​- while inflation expectations are seen as a key indicator of how high price pressures will prevail.

“Whenever you hear that inflation is temporary, remember that double house price inflation has not yet appeared in the indices. Residential real estate accounts for 40 percent of the core CPI, “Obama’s former Treasury Secretary and White House economic advisor Larry Summers said in a recent tweet.

The latest inflation-related readings come just days after a vigorous effort by Federal Reserve Chairman Jerome Powell to allay concerns about price pressures. Summers has been one of the most energetic voices warning of inflation, but it is beginning to rise within the Fed itself and other economists.

A post last week on the Dallas Fed’s website looked specifically at housing costs.

Economists Xiaoqing Zhou and Jim Dolmas wrote that rising house prices are usually a leading indicator for rents, which make up the bulk of housing costs in the CPI calculations. The correlation arrives with a delay of around 18 months, which means that rising housing costs promise higher rental costs in the coming years.

The bottom line is that they see rent and owner rent steadily increasing, with both reaching 6.9% by 2023. That would be roughly 0.6% of headline inflation as measured by the core consumer spending index, which the Fed prefers to measure.

Wall Street supports the Fed even if Main Street doesn’t

Still, many Wall Street economists believe the Fed is right in anticipating a slowdown in inflation as temporary factors such as supply chain disruptions and shortages of goods and workers wear off.

“We think [inflation] Expectations are about to peak and should decline over the next few months as moderation in oil prices affects retail gas prices, “wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.

CNBC Pro’s Stock Picks and Investment Trends:

In fact, economists are closely linking consumer inflation expectations to volatile issues like fuel pump prices, which have fallen by pennies in the past few weeks but are more than 41% higher than a year ago, according to the Energy Information Administration.

It’s not just energy, however, and it’s not just mom-and-pop consumers who are suspicious of continued price hikes.

Goldman Sachs said a composite the company uses, which examines seven measures of inflation expectations for companies, has reached its highest level in the two decades the company has tracked them.

In addition, corporate price announcements are at their highest level since 2011, and mentions of “inflation” among Russell 3000 companies were at their peak in a series of data also dating back to the same year, Wall Street firm economists said .

However, Goldman is also in transitory inflation camp and predicts that orders for durable “durable” goods, which have skyrocketed during the pandemic, will decline, offsetting the surge in price increases related to accommodation. Goldman expects core PCE inflation to decline from 3.8% in 2021 to 2% by 2023-24, in line with the Fed’s longer-term target.

Not all are confident that current pressures will give way anytime soon.

The market will have a good look on Friday when the Department of Labor releases its non-farm payroll report along with a measurement of the average hourly wage. Wage inflation is what worries the Fed most, and there is concern that the central bank is too complacent about the various factors that could fuel “bad” inflation.

“Energy, food and rents are the most visible forms of inflation. A sustained rise in these items will ultimately lead to higher inflation expectations and the Fed will have a problem, ”wrote Joseph Kalish, chief global macro strategist at Ned Davis Research. “My biggest fear is that complacency will give way to concern and that low interest rates will suddenly rise, leading to a reaction from Fed officials.”

Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign up to start a free trial today.