As we’ve been predicting here at DK since the Fall of 2022, the overall reported inflation rate has indeed fallen back to the Fed’s target level of 2 percent over the last six months. Whew! The mostly false but still pervasive 2023 media narrative of endlessly skyrocketing inflation and an inevitable deep recession is now finally yielding to the actual facts: inflation is back down without a recession, unemployment remains historically low, and economic growth is fine. We didn’t need the much-predicted deep recession after all, and the economists who said we did were just wrong and should admit it!
However, we do have a serious price problem, mostly around several things people really care about: car prices, food prices, air fares, and, most of all, housing transaction prices. We can and should urge carmakers and airlines to restrain price increases after their post-pandemic windfall; we should discuss both global warming and Putin’s war on Ukraine in the context of stubbornly high food prices; and we should question whether the Fed’s extreme reaction to the post-pandemic, post-Putin inflation spike is making the housing price problem better or worse! Below the fold, we’ll go through the latest official price data from the December Personal Consumption Expenditures (PCE) price data release from last week, and also discuss that graphic above on our crazy housing transaction prices.
First, here’s the data on PCE inflation, over the last month and the last six months (annualized) and over the last year (the “headline” rate). I prefer to measure “current” inflation trends using either the last 3 or 6 months — one month is too noisy to be meaningful, and 12 months is too lagged to be very helpful.
Second, here are some graphs showing various sectors: cars, groceries, gas, clothing, restaurant meals, transport fares, health care, recreational goods. You can see that while some prices for key items (cars, food, fares) are still too high, prices for other types of goods (clothing, sporting goods, health care) have been more restrained.
Note, in the graphs below, we’re showing price levels, not inflation, which is the rate of change in prices. The prices are indexed to January 2020 = 1. The raw data are easy to download from the Bureau of Economic Analysis.
Car Prices have Leveled Off, But Are Still Too High
Grocery Prices Surged After Putin’s Invasion In Early 2022, But Have Also Leveled Off
Gas Prices Spiked With the Ukraine Attack, But Have Basically Fluctuated Erratically
Clothing Prices Have Remained Low, Despite Pandemic-Related Shipping Costs
Restaurant Price Have Drifted Higher, Following Higher Food Prices No Doubt
Airlines Got a Huge Bailout During the Pandemic. They Should Pay It Back Instead of Raising Airfares!
Health Care Prices (Which Are Hard to Measure Due to Insurance) Have Been Seemingly Quite Restrained
Here’s the Price Index for Recreational Goods. I Guess This is Mostly RVs? (I Know Bicycle Prices Went Up a Lot in 2021 and 2022 Before Falling Back Toward 2020 Levels Recently.)
Finally, here’s the PCE Index for Housing and Utilities. It’s obviously way more stable than those Housing Transaction Costs at the top of this diary. Housing Prices are measured in the CPI and PCE Indexes with a complex, and frankly a bit goofy, owners’ equivalent rent method, which greatly stretches out price changes over time. Eventually the surges and crashes in transaction prices for purchasing housing and signing rental leases will match up with the PCE price index, at least in theory. But until then, the PCE index for housing vastly understates the near-term price increases faced by renters and would-be house purchasers this year.
Democrats should be talking about the Fed’s decision to raise short term interest rates in 2022 and 2023 in the context of housing prices. While mortgage rates are more associated with long term interest rates, and those rates have stayed mostly in a reasonable range (10-year U.S. bonds are currently about 4 percent), the Fed’s short term rate increases are likely undermining new housing construction. Builders need financing, and the prime rate for business loans has spiked since the Fed started raising rates. I know of at least one major apartment project in my town that has been put on hold due to adverse financing conditions.