Real consumer price inflation in the United States stands at around 4% per year, well above the Federal Reserve’s 2% target and well above the 2.7% increase Year-over-year% reported for April and reflected in short-term inflation-linked rate returns. US Treasury Securities.
This is due to a quirk of the measure of inflation in the United States, which includes house price inflation with a lag of one to two years.
Worse yet, the explosion in house prices in the United States – which is now increasing at an effervescent rate of 12% per year – portends even higher inflation for 2022. US fiscal and monetary policy has pushed 5,000 billion dollars in fiscal stimulus in an economy hampered by supply constraints, creating the economic equivalent of shaking a bottle of hot Pepsi while placing your thumb on the opening.
During the inflationary 1970s, Americans took out 30-year mortgages at 7.5% to 10% interest rates to buy homes to protect against inflation.
They are doing the same thing today, except at historically low rates of just 2.7%, thanks to the Federal Reserve’s decision to keep short-term interest rates at zero while buying $ 4 trillion. dollars of securities during the past year.
House price inflation has fallen to 12% per year, the peak of the housing bubble of the 2000s.
The US government’s calculation of house price inflation in the Consumer Price Index, however, shows a year-over-year gain of just 2%. This is because the government measure of “owner’s rent equivalent”, which represents almost 30% of the consumer price index, reacts to house prices with a lag, as shown in the graph below.
The decline in the government’s measure of home price inflation over the past two years coincides with a rise in home prices, as reported by the Case-Shiller Index. That puts two years of higher inflation in the pipeline.
There is a strong correlation between the Case-Shiller US Home Price Index and the housing component of the Consumer Price Index, but with a lag of 12 to 24 months. Clearly, today’s house price bubble will find its way into the Consumer Price Index figures released in 2022 and 2023.
Other components of the Consumer Price Index are about to jump, as I reported on April 16. The 9.8% jump in US retail sales from March to April reflects price increases more than the actual improvement in retail volume. The largest gain in retail sales occurred in motor vehicles and their parts.
The Mannheim Used Vehicle Price Index is up 30% year-over-year from February 2021, well above the government’s estimate of 9%. Part of the difference is because Mannheim takes used vehicle auctions into account at the wholesale level, which means that the 30% price increase is still passed on to the retail level. .
U.S. auto production fell about 25% in the first quarter, from an annual rate of 12 million vehicles in December 2020 to about 9 million vehicles in March, in part due to a global shortage of semiconductors.
Auto sales reached an annual rate of 13.6 million. Imports and inventories made the difference, and auto inventories fell to just two months of supply, one of the lowest levels in history and the lowest since the 2009 recession. automotive production due to the shortage of chips is global, limiting the availability of imports.
The world’s largest chipmaker, Taiwan Semiconductor Manufacturing Co, warned last week that “ongoing trade tensions or protectionist measures could lead to higher prices, or even unavailability, of key equipment” for the production of semiconductors.
TSMC echoed an earlier statement from China Huawei Technologies, which blamed the global chip shortage on US sanctions.
Rising sales, boosted by the Biden administration’s $ 1.9 trillion budget stimulus, are hampered by lower production and dwindling inventories. This in turn squeezes the used vehicle market, pushing up prices year on year.
Total machinery orders in the United States have fallen by about a third from the 2007 high after inflation, reflecting a systematic underinvestment in US production capacity.