Sunday, April 10, 2011

Can We Have Inflationary Pressures Building in U.S. With Falling Home Prices and 2% Wage Increases?

The chart above shows the annual growth rates in: a) consumer prices (CPI), b) average hourly earnings, and c) the FHFA home price index from 1976 to 2010.  The double-digit CPI inflation of the late 1970s (see brown line in chart) was accompanied by: a) double-digit increases in home prices for 11 straight quarters from 1977 to 1979 (red line), and b) 69 consecutive months with year-over-year wage increases of 7% or higher (blue line).  

Currently, we've had 22 consecutive months of year-over-year wage increases below 3%, and b) 13 consecutive quarters of negative year-over-year home price increases starting in late 2007.  Given the past historical patterns of inflation being accompanied by rising wages and home prices, it seems like the proponents of pending inflation have to explain how inflationary pressures can be building in the economy with: a) falling home prices and b) wage increases of 2% that are less than half the 4.5% average since 1965?  It would be historically unprecedented to start experiencing rising inflation in 2011 with falling home prices and stagnant wages, and unless and until we start seeing rising home prices and wages we might not see higher inflation this year.

Update/Main Point: In the 1970s, when we experienced high and rising inflation, there were widespread inflationary pressures throughout the economy: prices for housing, food, energy, etc. and wages were all rising.   Today, we have a mix of: a) inflationary pressures (most food items, oil/gas), b) deflationary pressures (natural gas (-6% over the last year), housing, electronics, some food products like eggs (-9% over the last year), boneless chicken breast (-4%), clothing, etc.), and c) no inflationary wage pressures.  We'll know that we're entering a new period of high inflation when we start to see widespread inflationary pressures throughout the economy.  People talk about food inflation, and yet McDonald's still has the same Dollar Menu prices today as three years ago, so even food inflation can't really be that bad yet, can it? 


At 4/10/2011 9:43 PM, Blogger Alzheimer's Reading Room said...

Trends persist. Trends change slowly. We are likely entering a new cycle.

In 1980, with inflation of 1.5 percent a month, it looked like inflation would never stop going up.

At 4/10/2011 10:05 PM, Blogger Rufus II said...

There will be high energy prices, but Productivity, and Unemployment are too high to be worried about Inflation. At least, in the near to near medium term.

Productivity is very, very important.

At 4/10/2011 10:08 PM, Blogger Bruce Hall said...

Said it before; saying it again... aggregation = misinformation.

Inflation is occurring in living expenses. Deflation is occurring in earning power and homes as investments. A really nasty combination that gets obscured by aggregation.

At 4/10/2011 10:11 PM, Blogger Alzheimer's Reading Room said...

Don't they call that stagflation?

At 4/10/2011 11:04 PM, Blogger Hydra said...

Bought any food lately?

At 4/11/2011 1:26 AM, Blogger PeakTrader said...

Aggregation is complete information.

The GDP Price Deflator, for example, which correlates with the CPI very well, reflects the change in prices of all final goods.

When someone's inflation rate is 3%, over a year, and another's inflation rate is 1%, over a year, inflation isn't 3% for both people on average.

Milk prices, for example, fell and were flat for several years. Then they rise a little and some people are worried the sky is falling.

Also, beef may rise 2% in aggregate. However, the expensive cut may rise and the cheap cut may fall in one period, and in the next period, the expensive cut may fall and the cheap cut may rise (the composition of a cow doesn't change much).

At 4/11/2011 6:09 AM, Blogger geoih said...

Didn't we hear all of this "unprecedented" talk back in the 70's with high inflation and high unemployment?

If your economic theories can't explain outcomes, then maybe the theories are wrong.

At 4/11/2011 6:58 AM, Blogger Methinks said...

Biflation. Home prices can continue to fall as all other prices rise.

At 4/11/2011 7:54 AM, Blogger morganovich said...

that's a very disingenuous argument.

we might well ask the flip side of the question:

could we possibly have had such low inflation from 2000-2007 with house prices going up so much?

owner equivalent rents are not that sensitive to short term housing price moves.

also note that about half of americans rent, and rents are up in many areas as vacancies drop.

you seem to be trying to have your cake and eat it too dr perry.

either you must admit that huge houysing gains did not drive inflation from 2000-7, or you must admit that cpi seems insensitive to housing, but you are trying to have it both ways...

At 4/11/2011 7:58 AM, Blogger morganovich said...

further, declines in home prices only matter if you trade. most people do not buy a house every year.

rates have started back up. a 10 year bond has a yield 40% higher than in october. THAT does cause inflation. loans are more expensive and fixed variable rate loans move. loans are difficult to get as well if you are bucking for the heavily subsidized ones.

overall home sales are very low, also demonstrating that housing sales are a smaller part of the consumption basket than usual.

At 4/11/2011 8:07 AM, Blogger morganovich said...

finally, the question itself is flawed:

"Can We Have Inflationary Pressures Building in U.S. With Falling Home Prices and 2% Wage Increases?"

yes. of course we can. rents are up. rates are up.

wages may not be up anything like prices are. that can easily happen if the inflation is based on massive monetary expansion. wages did not keep up with inflation in the 70's either.

that just underlines how pernicious the inflation is.

worse, this time we are trying to tell people it's not happening. that in and of itself may explain part of the failure of wages to rise - many contracts index to CPI. thus they will not move as they used to. workers and employers also may not realize how badly they are falling behind if they believe BLS numbers.

At 4/11/2011 8:26 AM, Blogger morganovich said...

one more observation:

it is very interesting that housing and CPI used to move more or less together before CPI was changed in 1992. from then until 2005, they diverged massively for the first time.

this is a sign of flawed CPI no longer reflecting inflation in housing.

this brings us back to my original point:

reported CPI did not reflect the biggest housing boom in US history. it declined the whole time in direct contrast to prior periods. why would you expect to it register the decline?

At 4/11/2011 9:06 AM, Blogger Jason said...

further, declines in home prices only matter if you trade. most people do not buy a house every year.

For many existing home occupiers with a mortgage note, they are experiencing the worst of all worlds, pre-2006 housing costs with 2011 food and energy costs. Seems pretty obvious if you ask the right question.

At 4/11/2011 9:59 AM, Blogger McKibbinUSA said...

Reality is that a Main Street Depression is strangling the nation, while the Federal Reserve continues to prop up public corporations and the Federal government with easy cash. I suppose the assumption of the Federal Reserve is that assuming they can facilitate a national recovery, the recovery of states and Main street will somehow follow. So, the question is not why Main Street is in depression, while public corporations and Federalism is thriving, but rather what will happen to Main Street (e.g., wages and home values) should the gamble on public corporations and Federalism fails. We need the economic optimists to reconsider their focused attentions away from Federalism alone, and look as well at the plight of Main Street in their assessments. In the meantime, no one on Main Street should have much trust in the Federal Reserve, which has embarked on a gamble that places Main Street America at grave risk should the gamble fail...

At 4/11/2011 10:26 AM, Blogger Buddy R Pacifico said...

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At 4/11/2011 10:29 AM, Blogger MaggotAtBroad&Wall said...

The argument seems to be that since house prices continue to deflate, and wage earners see no growth in wages, then that offsets the spike in most commodities resulting in a flattish CPI. Therefore, the FED should continue to punish the elderly fixed income savers with disastrously low interest rates and inflate another bubble in commodities.

Wny not? It didn't work out so well with the technology and housing bubbles, so the third time with commodities must be the charm

At 4/11/2011 11:01 AM, Blogger Benjamin Cole said...

An all-time record best post by any economist ever: Thank you Dr. Perry.

This sniveling about inflation, shadow inflation, secret inflation is really too much. No doubt frontmen for bondholders are mau-mauing the "terrible" inflation we have.

In Japan they have no inflation, they have protected bondholders. They also hve had falling asset values for 20 years, and are the perennial sick man of Asia. Good luck with stamping out inflation--the monetary noose around your neck also stamps out economic growth and innovation.

Truth is, deflation is embedded in the USA economy, unit labor costs are going down. We need an aggressive, bold Mr. Bernanke. 'Nuff said.

At 4/11/2011 12:21 PM, Blogger Paul said...


"'Nuff said."

Really? You mean you're not going to write the same tired "print money or become Japan" spiel forever into the future?
That is good news indeed!

At 4/11/2011 12:42 PM, Blogger juandos said...

"Truth is, deflation is embedded in the USA economy, unit labor costs are going down. We need an aggressive, bold Mr. Bernanke"...

pseudo benny proving yet again he's learned nothing and is wasting bandwidth bragging about it...

HILL POLL: Inflation, fueled by gas and food prices, adds to worry

And It's Not Even Summer: Gas Jumps 19 Cents In Two Weeks, Less Than 10% Below All Time High

At 4/11/2011 1:06 PM, Blogger Buddy R Pacifico said...

Worldwide Commodiites Prices are up substantially over the last 12 months. Cotton was up a stunning 167.7% in the last year. The last 30 days has seen a moderation in the price of many commodities. It is difficult to think that the overall soaring of commodities (ex. nat gas) has not lead to U.S. inflation.

At 4/11/2011 1:13 PM, Blogger Audacity17 said...

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At 4/11/2011 1:15 PM, Blogger Audacity17 said...

Everywhere I've eaten the last few years has tried to hold prices down...but the size and composition of the food has decreased. That is, cost per ounce has went up. Even McDonald's "dollar menu" has seen the portion of the french fries, drinks etc reduced. It appears to me that CPI may not be up, but margins are getting crunched and firms are responding by lowering quantity.

At 4/11/2011 5:03 PM, Anonymous Anonymous said...

The typical cause of inflation is too much money chasing too few goods. Our federal government recently injected an extra trillion dollars into the economy, but no inflation has appeared. That is primarily because the extra money is not being spent by consumers. Much of it is tied-up in stock, bond, and fund investments by corporations (that are unwilling to spend money on expansions or on rehiring). Banks are also sitting on record amounts of dollars because they cannot or will not loan money.

If this extra trillion ever reaches consumers, and if consumers feel comfortable enough to spend rather than save or repay debt, then there will be inflation. I don't see this happening in the near future, since few consumers feel that the economy is doing well enough for them to go on spending sprees. Our current lack of inflation is not a sign of a strong economy; it is a sign that people remain uncertain about whether our economy will recover.

At 4/11/2011 6:26 PM, Blogger PeakTrader said...

Morganovich, "too many" goods, e.g. houses and autos, don't normally cause inflation.

Anyway, existing asset prices aren't included in the CPI.

Otherwise, we'd have massive deflation from autos :)

At 4/11/2011 9:07 PM, Blogger Ron H. said...


"'Nuff said."

Really? You mean you're not going to write the same tired "print money or become Japan" spiel forever into the future?
That is good news indeed!

If that were only true. I'm afraid that Benji's last sentence is intended to be a quote from Nuff. :-)

At 4/12/2011 1:59 AM, Blogger PeakTrader said...

Housing became more affordable in the 1990s and 2000s.

At 4/13/2011 2:00 PM, Blogger VangelV said...

"Can We Have Inflationary Pressures Building in U.S. With Falling Home Prices and 2% Wage Increases?"

Yes you can. While overpriced conditions in equities, bonds, housing, and labour may be correcting and floating lower you can still see a general price increase if the Fed continues to print money and push for a weaker dollar.


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