Inflation - Oh There It Is, In Housing

by: Markos Kaminis


The big question in Jackson Hole this week is all about the apparent absence of inflation.

But, we saw inflation in all its glory this week in robust rates of price change in new and existing home sales.

Housing price change is of course benefiting from a shortage of supply, but consumer demand gains could do the same for other consumer goods and services.

Full employment is upon us, and indications of its benefits should increasingly become evident.

Inflation is here in housing.

There's a myth out there that inflation is dead, that it's absent from this economic expansion. The issue purportedly has the Federal Reserve and other economists confused and questioning whether the Phillip's Curve is even still relevant. But, I see inflation as clear as day in the very relevant to the U.S. economy - real estate market.

They say inflation is absent from the current economic expansion. It is deeply delinquent in the Fed's favored inflation gauge, the Core PCE Price Index (found in the Personal Income & Outlays Report), where it was last marked in June at a 1.5% annual rate. And, as far as the Consumer Price Index goes, inflation was also still short of the Fed's 2.0% target, at 1.7%.

Friday, as the U.S. Federal Reserve Chair prepares to deliver an address on Financial Stability at the Kansas City Fed's Jackson Hole Symposium, the question of the day is about the apparently absent inflation and how that will influence monetary policy. People say, the Phillip's Curve no longer applies even; the Phillips Curve tells us inflation historically comes with labor market robustness. But, with the job market operating at about full employment, at least as indicated by the 4.3% unemployment rate, price pressure is still missing; or is it.

One place where inflation is not missing, and is quite robust actually, is in housing (NYSE: IYR). Thursday's Existing Home Sales data for the month of July, for instance, reveals the median home price (for all types of existing homes) in America is up 6.2% year-to-year in July. And Wednesday's New Home Sales data for the month of July showed a 6.3% increase in the median price of a new home year-to-year. That is pretty robust price increase.

Now, price pressure in the housing market is certainly relative to the shortage in housing supply, though new home supply (NYSE: XHB) improved in July to 5.7 months, from 4.7 in June. However, the existing home market illustrated the situation best, where supply fell to a shortage level of 4.2 months this July, versus 4.8 months a year ago.

But won't the same supply/demand situation eventually be reflected in other consumer products and services sectors once the fully employed economy starts spending more? Yes, it will, and it is already showing up in energy demand (NYSE: USO), where demand forecasts of the International Energy Agency (NASDAQ:IEA) and of OPEC have each been revised higher recently.

Inflation is starting to show up in the labor market, as hirings match up favorably with healthy job openings, and as the "quits" rate shows growing confidence in the American worker and her ability to find a new job in today's market - see my report on JOLTS data this month Worker Demand Jolted By Strong Economy.

Last month's report for personal income showed no change in total income, but growth in compensation was offset in the reported period by a monthly decrease in dividends and interest income, clouding burgeoning price pressure in labor. The Phillips Curve still applies folks; it's just that slack in the labor market has made finding the true point of full employment a bit less precise. We are getting there now, and we should see inflation result.

Thursday's data for July existing home sales marked the 65th consecutive month of year-to-year gains, and this July's new home sales showed the highest price for the month in history. Last December's data showed the highest median price in any month's history. So, as the media and market (NYSE: SPY) experts debate whether inflation will come along, let's not forget that inflation is already present in the housing market, as clear as day. Readers interested in my work on the economy, real estate and other markets are welcome to follow the column here at Seeking Alpha.

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