Inflation Watch -- Last Week of Feb-2013 Edition

The zen master of the housing market, the great Lawrence Yun, released the revised 2012 annual figures for NAR recently, and housing inventory has already dropped to the low level of 4.2 months...



Existing Home Sales from NAR
(S.A. annualized volume in millions, median sales price in thousands of dollars, housing inventory in months)
2013-Jan, 4.92, 173.6, 4.2
2012, 4.66, 176.8, 5.9
2011, 4.26, 166.1, 8.3
2010, 4.19, 172.9, 9.4


NOTE: I think the annual 2012 figures from Case-Shiller will come out on Tuesday, February 26.

And that 4.2 figure probably won't shoot up soon again, as nationwide foreclosure notice listings (as calculated by RealtyTrac here), hit a 6-year low last month of 150,864 (i.e., lowest monthly total since June 2006).







And then there's consumer inflation, in the form of the rising CPI-U numbers, which only gave annual inflation of 3.16% & 2.07% in 2011 & 2012, but which also have recorded higher than usual (at least in the post-2008 environment) core inflation numbers for the last 5 months...

CPI Data from BLS (Department of Labor)
(Month, m-o-m core inflation [excluding food & energy])
2013-Jan, 230.280, 0.3%
2012-Dec, 229.601, 0.1%
2012-Nov, 230.221, 0.1%
2012-Oct, 231.317, 0.2%
2012-Sep, 231.407, 0.2%

That is only the 4th time since the summer of 2008 that the BLS has recorded 0.3% core inflation for a month, the others being in April 2009, May 2011, & June 2011.

I know there are significant rounding errors and that those 5 months still only account for an annualized rate of about 2.2%, but still these are the winter months when inflation is typically at its lowest levels of the year, so we can expect the inflation to be higher later in the year, other things being equal.

I suppose there is the counter argument that the sequester, along with continuing state budget tightening and recession in Europe, will slow inflation, but I guess we'll just have to wait and see about that.



Finally, there is how the inflation argument relates to the monetary policy debate ( LINK) about whether or not "even the short term effects of ZIRP are stimulative."

I guess I'm still not ready to hit that argument with full force, because I've been too busy with other things, but to my old list, I think I can add John B. Taylor's " Fed Policy Is a Drag on the Economy" (Tue., Jan. 29, 2013) & Andy Kessler's " When Interest Rates Rise, Watch Out" (Fri., Feb. 22, 2013).

From Taylor...

quote:

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Consider the "forward guidance" policy of saying that the short-term rate will be near zero for several years into the future. The purpose of this guidance is to keep longer-term interest rates down and thus encourage more borrowing. A lower future short-term interest rate reduces long-term rates today because portfolio managers can, in a form of arbitrage, easily adjust their portfolio mix between long-term bonds and a sequence of short-term bonds.

So if investors are told by the Fed that the short-term rate is going to be close to zero in the future, then they will bid down the yield on the long-term bond. The forward guidance keeps the long-term rate low and tends to prevent it from rising. Effectively the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low.

The perverse effect comes when this ceiling is below what would be the equilibrium between borrowers and lenders who normally participate in that market. While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate.

This is much like the effect of a price ceiling in a rental market where landlords reduce the supply of rental housing. Here lenders supply less credit at the lower rate. The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy.

Research presented at the annual meeting of the American Economic Association this month by Eric Swanson and John Williams of the San Francisco Fed is consistent with this view of credit markets. It shows that during periods of forward guidance, the long-term interest rate does not adjust to events that shift supply or demand as it does in normal periods. In addition, while credit to corporate businesses is up 12% over the past two years, credit has declined to noncorporate businesses where the low rate is more likely to be a disincentive for lenders. Peter Fisher, head of fixed income at the global investment-management firm BlackRock and a former Fed and Treasury official, wrote in September: "[A]s they approach zero, lower rates ... run the significant risk of perversely discouraging the lending and investment we need."

Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects. No one should want a continuation of this vicious circle.

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Kessler just talks about what kind of damage interest rate hikes do once they actually become reality.

Neither of these things, however, gets to the main precursor point that needs to be made about if and when consumer inflation will occur in the first place.

Right now, we have little evidence that it will besides rising asset prices and a higher-than-normal core inflation figure for January. Even so, a little bit of evidence is still evidence.

So right now we just continue to wait on the "green shoots" of consumer price inflation.