Weekly Inflation Outlook: An Antacid For My Headache
Michael Ashton | Sep 26, 2022 10:56
This week we will again get several opportunities to reconsider the received wisdom that when mortgage rates rise, home prices must fall. Last week, median home prices in the existing home sales report were reported to have declined about -1.5% month-on-month (mom) on a seasonally-adjusted basis (I had to eyeball the seasonal because they don’t report a seasonally-adjusted figure).
Prices have fallen over the past two months, although some of that is seasonally-normal. The data on Tuesday will be higher-quality data from July (S&P CoreLogic Case-Shiller data) which is expected to show a small gain of 0.2% mom. Home prices have definitely come off the boil, and are declining in some precincts.
But it’s a little hard to tell yet how much of that is merely exaggerated late-summer seasonality, how much is distressed sellers hitting bids, and how much is a movement lower of the true equilibrium nominal price. Because we are also seeing stories like inflation . Here is my latest:
- It took years of zero rates—if low interest rates are what cause inflation—to get inflation. If rates are the answer, then, shouldn’t it take years to get disinflation?
- On the other hand, it took mere months of explosive money growth to cause inflation. If money is what matters, we could change the price level quickly by changing the money supply.
I’m not saying that the Fed shouldn’t raise rates or, rather, simply allow interest rates to find their free-market level rather than holding them artificially low. Of course, they should. What I’m saying is that that medicine is treating the asset-price problem, not the consumer-price problem. If you have a headache, and take an antacid, then it still has an effect. It just doesn’t fix your headache.
Disclosure: My company and/or funds and accounts we manage have positions in inflation-indexed bonds and various commodity and financial futures products and ETFs, that may be mentioned from time to time in this column.
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