Is More Inflation On the Way? – MishTalk

A Tweet on rents, and a video discussion between Danielle DiMartino Booth and Jim Bianco, both shown below, highlights the debate over inflation, rate cuts and the Fed.

Rent vs OER Chart Notes

• OER stands for Owners’ Equivalent Rent. It is the price one would pay to rent their own house, unfurnished without rent.
• Rent of primary residence is just what one would expect. It is measured price of rent, unfurnished, without utilities.

Mass Confusion Over OER

Contrary to widespread myth, OER is a measured price with very minor imputations that do not matter. OER is designed to track rent prices and it does. It is a measured price.

Much of the confusion comes from a misquoted BLS statement on OER, emphasis mine.

The expenditure weight in the CPI market basket for OER is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

Note that these responses are not used in estimating price change for the shelter categories, only the weight.

People quote that question as if that is how the BLS measures prices. It doesn’t. Prices, except for minor, irrelevant imputations, are based on actual measured rents.

The problem with OER is the weight not the measure. An even bigger problem is no one actually pays OER. Rather, people pay mortgages.

That is the backdrop for this Tweet and my rebuttal that follows.

Hoot of the Day

“Mish keeps telling me rents are going up.”

Well, they have been. Deepak referred to Resiclub. Here are some Resiclub links.

The problem I have with Resiclub is I have no idea what they are measuring. The reports are subscription only.

We do know there is a huge problem with Zillow and Apartment list measures. The latter shows rents are declining. They aren’t. Apartment List does not seasonally adjust and the data is new tenant leases only.

New tenant leases are only about 9 percent of leases. And very little of that is in the fourth quarter or first quarter. But on the basis of new leases we see reports that rents are falling.

Is OER Poorly Constructed?

OER very closely tracks rent which it should do. If rents drop, so will OER because contrary to popular myth it is based on actual rents.

OER is well constructed but poorly implemented.

The problem is no one pays OER! They pay mortgages. So on that basis people want to take it out of the CPI.

The Fed and economists ignore housing prices because they are a capital expense. But if the Fed bothered to look at housing prices instead of OER, it would not have done baby step hikes in 2006.

Inflation Matters, Not Just Consumer

I keep repeating, to deaf ears, so I will now scream Inflation Matters not just consumer inflation. If the Fed leaned against asset bubbles in 2006 and 2017 on, we would not be where we are.

If the Fed cuts interest rates where do home prices go? The stock market? What about the wealth impact?

OK rent lags. Since OER tracks rent (As It Should) OER lags too.

But what about the lag impacts of Bidenomics? Of massive union contract wages? Of the strain of immigration on health care services and costs.

The whole focus on lags, is in one direction only.

One-Sided Spotlight On Lags

We no longer have global wage arbitrage. We no longer have global outsourcing. We no longer have just in time manufacturing.

Instead, we have massive wage increases in union wage contracts, a massive wave of boomer retirements, increased need for health care services, and massive immigration that is pressuring both housing and health needs.

Denver Health at “Critical Point”

On January 24,2024, I noted Denver Health at “Critical Point” as 8,000 Migrants Make 20,000 Emergency Visits

The Denver hospital system is turning away local residents because it is flooded with migrant visits.

Eight-thousand migrants from Central America accounted for approximately 20,000 visits in 2023. Denver Health asked the Federal Emergency Management Agency to provide funds for immigrants’ medical costs. The state and federal governments aren’t reimbursing the hospital, which spent $136 million for patients who didn’t pay.

Another Hotter Than Expected CPI Led by Shelter

For the 29th consecutive month rent was up at least 0.4 percent. Shelter, a broader category, rose 0.6 percent. Food rose 0.4 percent.

For discussion, please see Another Hotter Than Expected CPI Led by Shelter, Up Another 0.6 Percent

OK, rent lags. But tell that to the person who has now seen rent rise for 29 consecutive (smoothed) months.

Tell that to the person trying to buy a house at all time highs.

Now what happens to home prices if the Fed cuts rates now?

And take another look at the lead chart. Rent did not fall in the Great Recession, nor did it rent fall in the short Covid recession. It was not until May of 2010 did year-over-year hit zero.

Some of that was a lag impact, but it was also do to a home price crash. Yet, here we are predicting declines in rent without an accompanying crash in anything.

The Fed Impact

That is the bubble the Fed created with interest rate policy.

But No! Let’s not call that inflation. Let’s call that an egg salad sandwich and claim “Truflation” is 1.5% or whatever based on one-sided lags.

Danielle DiMartino Booth vs Jim Bianco

Jim Bianco and Danielle DiMartino Booth had an excellent debate on inflation.

Booth believes inflation is about to crash. Bianco is in the no landing camp.

Congrats to Natalie Brunell for an excellent interview.

Who’s Right?

Both of them but on different things. But what’s the timing? None of us really knows.

Who will be president? All three of us prefer “none of the above”. But how do we get there?

For now, I think Bianco has the better side of the inflation debate. But, I don’t buy his no landing (no recession) thesis. To date, however, Bianco has been more right than anyone else.

I side with Booth on employment numbers and a recession.

Due to the impact of retiring boomers and a need to fill many of those jobs, I don’t see a huge rise in unemployment. That’s been my position, correctly so for years.

Also, I don’t see significant declines in rent. We did not see rent declines in the Great Recession housing crash. Siding with Jim, I see a lot of pent up inflation pressures.

Everything is not in one basket or the other. And the Fed is in an impossible situation right now. If it cuts based on “Truflation” how big will the bubbles get?

Agreeing with Danielle again, I expect the economy is going to hit a great big brick wall, but not necessarily a huge deflationary one.

The concern both see, and I am in that camp as well, is another Fed + Congressional overreaction with the deficits we have now would be highly inflationary.

What About Bitcoin?

Near the 59 minute mark, Bianco says “The spot Bitcoin ETF is an admission of failure. You are sucking crypto into the current system. The whole damn place is run by a bunch of dgens, which is what Danielle was talking about, dgen being a degenerate gamblers.”

Violent Agreement?

In some ways, the three of us are in violent agreement, but in others there is a big difference on timing, the nature of lags, and the likelihood of a recession.

What’s Really Going on With Rent? Five Measures to Compare

Returning to the topic that started this post, please see What’s Really Going on With Rent? Five Measures to Compare

And to put a spotlight on a basic agreement with Danielle, please see Tapped Out Consumers? Retail Sales Unexpectedly Take a Big Dive

This economy is not as strong as many seem to believe.

I do not buy either the soft landing or no landing theory. I expect a sudden brick wall. If correct, the timing may very well determine the election.