Share- There is no inflation. The Federal Reserve can therefore relax and not hurry in raising rates. However, housing costs continue to rise above the comfort level.
- Specifically, the Consumer Price Index declined 0.1 percent in April over the past 12 months. Food prices are up by 2 percent and shelter prices are up by 3 percent. But the large decline in energy prices, down 19 percent, is helping the broad consumer inflation to be zero.
- The shelter costs as computed by the government are a bit different than what ordinary consumers may think. Rent payments are a straight forward calculation and they rose 3.5 percent, which is very close to the fastest pace since 2008. Homeowner mortgage payments would be considered to have not risen at all by most homeowners since nearly all have either 30-year fixed rate mortgages or own it out-right with no balance. Or for would-be homebuyers, the median national home price rose by 8.9 percent in April. But this is not how government statisticians compute homeownership costs. It computes something called owner-equivalent rent, which is a hypothetical rent a homeowner would pay to rent out their home. And this owner-equivalent rent rose by 2.8 percent, the fastest growth rate since 2007. Meanwhile, wages are rising by only 2 percent, so the housing costs squeeze is becoming acute.
- For monetary policy, the Federal Reserve is keener on the “core” inflation by not factoring the volatile price movements of food and energy components. The core inflation rose at 1.8 percent. The Fed likes to see this at near 2 percent but not greatly over, so it should be fine with the current interest rate policy. Furthermore, GDP growth for the first quarter is likely to be revised to a mild negative and the second quarter GDP growth will be sub-par at around 2 percent. Therefore, I have revised the timing of the Fed policy to delay the rate hike to October (from what I previously thought to be in September).
- As an aside, how to beat consumer price inflation when going out. First, never order the most expensive item. It is there only as a decoy to make other menu items look reasonably affordable. Only the professional sports athletes or celebrities order this item, thinking it impresses their friends. Second, we all know to avoid restaurants with heavy tourist traffic since these hungry visitors do not know where to go. In neighborhood restaurants, avoid places where there are too many mini-skirts. Young men are willing to pay high prices for even lousy meals just to be near them. Knowing this, these types of restaurants have no incentive to improve on their cooking skills.
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