Rex Nutting: America’s inflation problem isn’t high wages, it’s high rent

0
86
views

While the Federal Reserve is busy worrying that wages might be rising too fast, the rest of us have a different concern: The rent’s too damn high.

If we have an inflation problem, it’s that the cost of housing is rising faster than our ability to pay.

The consumer price index (CPI) increased 2.2% in the past 12 months, the Bureau of Labor Statistics reported Tuesday. Nearly half of that 2.2% gain was due to just one item in the consumers’ budget: The cost of putting a roof over your family’s head.

The accompanying chart shows which goods and services contributed the most to inflation over the past year. That’s a function of how much prices for those items changed and how much of them we consume.

Shelter (the cost of either renting or owning a house) accounts for about a third of the CPI market basket, but drove nearly half of the gain in the CPI over the past year.

Also read: The most important chart in the world, updated for February CPI data

This is important for Fed policy. Shelter prices are rising rapidly because the supply of housing isn’t keeping up with the demand. Sure, we could bring supply and demand back in closer alignment by quashing demand, but the better solution would be to increase the supply of apartments and homes.

If the Fed raises interest rates further to cool demand, it would also cool the supply of new housing, which is quite sensitive to interest rates, as Dean Baker points out. That puts the Fed in a bind, because raising interest rates now would increase, not decrease, the pace of shelter inflation.

Housing prices have been rising consistently faster than wages since the Great Recession ended, putting more pressure on family budgets. Fortunately, the prices of other goods and services have generally risen at a more modest pace.

Over the past year, inflation has been concentrated in a few items shown on the chart. Those 10 items make up about 61% of consumer spending, but accounted for all of the inflation. For the other 39%, increases in some prices were offset by declining prices for other items.

Also read: What the Fed doesn’t know about inflation could cost you your job