the wider economy is almost certainly not in recession, but the US housing market is facing a painful reset. As the Federal Reserve raises interest rates to keep inflation in check, housing, the most interest-rate-sensitive sector of the economy, is being hit hard. Today’s guest, Mark Zandy, chief economist at Moody’s Analytics, discusses volatility in the U.S. housing market, the prospect of a correction, and what the decline in home prices across the country means for the broader economy. How a simultaneous global decline, and a very strange year in China, is affecting our economy.
Derek and Mark look under the hood to understand the relevant figures in the latest inflation report.
Derek Thompson: I think we should start this week with the inflation report. Let’s start with a confession here. I got this completely completely wrong. I was looking at gas prices and assumed he would get two straight months of headline inflation at virtually zero or just below zero. I did not know. Instead, core inflation rose. What was the most worrying thing you saw in this inflation report? What surprised you?
Mark Zandy: Well, headline inflation was fine. It was 0.1 up. If that’s where we are, it’s a win. This leads to lower oil, gas and energy prices. No problem. The real problem is core inflation in things like energy and food. Economists tend to take note of this. Because this is a very good forecast of future inflation. Because, as we’ve seen, energy and food prices go up and down, but we get a better sense of where the core inflation lies. we are heading it was expensive. Uncomfortably high, 0.6. My guys doing this for a living expected 0.3. It doesn’t sound like much, but it makes a big difference. Annualized, this is the difference between he 7% inflation and 4% inflation. This is a big problem and definitely going in the wrong direction. This means the Fed has a lot of work to do to raise interest rates. Clearly the market didn’t like it. No one should like it. It’s quite disconcerting.
Thompson: Mind you, I’m reporting both monthly and annualized numbers here because a few people ran into trouble last month. A month ago there was this rigamarole where Joe Biden said, “Inflation is 0% for him.” And you say, “No, that’s a monthly number. You have to report the inflation rate on an annual basis.” That’s double the monthly inflation rate.
Zandy: yes. That’s right, 0.3. And when you convert to an annual rate, the poor man’s way is to multiply by 12. 12 months. If it continues to increase at a monthly rate, you can get an idea of the inflation rate for the entire year. 0.3 is 4 percent, 0.6 is 7 percent. It makes you feel the difference between them.
Thompson: The Shelter Index is a key part of why core inflation continues to rise faster than you or I expected: it was up 0.7% in August from 0.5% in July. The rent index also rose 0.7% in August. It’s a bit confusing, so maybe you can help me clear it up.If I asked Zillow, and I said, “Hey, what’s going on with Zillow’s rent inflation?” We saw a nationwide peak in rents around May, March.” But you call other sites that list new rents for apartments that people are ready to move into. I’ve reached it.” But now, if you ask the government, the government says the rent CPI is still accelerating. Why am I seeing this discrepancy?
Zandy: This is how the Bureau of Labor Statistics does this. Survey the renters in groups of 1/6. That means his 1/6th of the renter is 1 month, then 6 months later, or 5 months later. For example, he said that a market rent increase in February would take about six months to reflect in rent inflation as measured by the BLS. It’s just a methodology of how BLS does it.
There are many non-intuitive factors here when measuring housing costs. One very important and interesting point is that higher rents are driving up housing costs for most homeowners, according to the Bureau of Labor Statistics. But that doesn’t mean they’re paying out more cash, right? Because they have a 30 year fixed rate mortgage, a 15 year fixed rate mortgage. Nothing has changed for them. But the BLS says, “Oh, it’s just that inflation has gone up.” So from a cash standpoint, an income standpoint, it’s not as bad as it sounds. This is bad. I’m not saying it isn’t. It’s not the same as an 8-10% increase in food prices.
Thompson: Empirically, shelter inflation seems to be very different from energy inflation. When gas prices fluctuate, in two weeks everyone will see gas prices go up. And when you have to refuel your car, you have to pay more for the same amount of gas. But with rent inflation, many, most renters, already have fixed contracts. If they’re homeowners, they’re probably paying a fixed mortgage. Inflation should make you think about the fact that most people paying for shelter aren’t paying higher and higher prices every month, so everyone is paying higher prices. is.
Zandy: Well, that brings us back to your Zillow point.Zillow, that rent increase is for people who move into a new apartment, or who are renting and have a lease coming up and are renewing their rent now. , as you point out, is a small fraction of the population. Most of the population that does not occur for a period of time. Zillow’s rent increases are not representative of the rent increases most people face at any given time. But broadly speaking, Zillow’s report that market rents aren’t rising that fast is actually good news. It will eventually start showing up in the Bureau of Labor Statistics consumer price inflation. Probably my guess is that it’s very late this year and as we get into next year, we’ll start to see that rollover. Now it adds a lot to overall inflation, so we need it.
This transcript has been edited for clarity.
Host: Derek Thompson
Guest: Mark Zandy
Producer: Devon Manze