CAMS Weekly View from the Corner - Week ending 9/6/24
September 9, 2024
For the citizen within the upcoming expected interest rate cutting cycle should prove to be very interesting and potentially quite damaging. Price inflation has not been defeated albeit the storyline has certainly improved and improved a lot.
The central question as we look downstream on the timeline is will the expected rate cutting cycle add fuel to a price inflation fire that is no longer blazing but certainly is still burning stronger than history offers is relatively manageable for the citizenry.
In Federal Reserve lingo we have yet to see any notable price inflation metric hit their 2% Target level while in the case of the well recognized Consumer Price Index (CPI) it is far closer to 3% than it is 2%.
As shared in numerous editions it has been remarkably stubborn in the low-to-mid 3% range for over a year. We have just broken the 3% barrier with its most recent update coming in at 2.9%.
If we drill into CPI a bit we know home prices are not factored into the CPI computation.
With this actual home prices can go on an upward trajectory but CPI will not ring an alarm to policymakers.
Those in the market for homes certainly register the trajectory but to policymakers all seems fine if the CPI’s primary metric for addressing housing price inflation remains relatively tame. This scenario has unfolded at different times in this 21st century.
One stand-out period was in the early part of this century circa 2002 through late 2005. For these years while home price indices were consistently tacking on notable growth rates the CPI’s housing metric was well contained offering all was fine.
For perspective by the time late 2005 arrived the Case/Shiller Home Price Index (a highly respected and often referenced home price index) was posting near 15% yr/yr growth rates while the CPI’s primary measure meant to capture housing price inflation (Owners’ Equivalent Rent as it is known) was registering just over 2% growth rates.
More recently, circa latter 2019 and on through 2020 we seen a similar storyline play out but was even more severe in its intensity in both time and polar opposite messaging from the above referenced measures.
Below we share two charts to offer a visual which are excerpted from an edition we offered in early 2021 entitled “Are We Going to Do the Mid 2000's Housing Bubble Again?” We share them as presented within that edition.
The top chart depicts the CPI’s measure meant to capture housing price inflation while the bottom chart is the aforementioned Case/Shiller Home Price Index. Both are noting the yr/yr growth rate. The visuals offer literal polar opposite messaging.
While the top chart’s growth rate was dropping from a 3% general growth rate down to 2% the bottom chart’s growth rate was erupting from a general 2% growth rate level to 10%. In the time period CPI remained quite subdued coming in consistently below 2%. CPI alarm bells were not ringing.
As 2021 then unfolded and on into 2022 the CPI’s housing price inflation measure growth rate exploded higher coupled with CPI itself doing so while D.C. officialdom consistently offered this was a transitory price inflation issue. For its part, the respected Case/Shiller Home Price Index (as one example) had been offering if not screaming long before this was anything but transitory.
General housing costs, food and energy independently and cumulatively play a significant role in the everyday citizen’s budget.
When one of these - such as housing above - is breaking notably upward but is not identified as such within CPI or other price inflation measures the citizenry experience the reality while often referenced go-to measures remain well behind the curve. This mistakenly offers all is contained in the realm of prices when actual real world reality is offering a different experience to the citizenry.
Current Day
Below we bring this storyline up to current day as we offer a picture which allows us to extract two messages simultaneously. The chart dates back to year 2000 to capture the storyline of this 21st century.
The blue line represents the aforementioned Case/Shiller Home Price Index while the red line represents the previously offered primary CPI measure for housing price inflation – Owners’ Equivalent Rent.
Importantly these are the actual index readings not yr/yr growth rates. In addition, both have been indexed to 100 in order to see how they have tracked in this century. Keeping it simple, we can think of the beginning of this chart as a starting line in a race and by the end of the race (far right) we see who wins if you will.
What we can glean from the above is how the Case/Shiller Home Price Index (blue line) growth has handily outperformed the Owners’ Equivalent Rent (CPI’s primary measure for housing price inflation – red line) growth level.
Specifically, in this century the actual home price index (blue line) has tripled while the CPI’s measure for housing price inflation (red line) has “only” doubled. This depicts a tremendous difference in bottom line messaging from two measures which are meant to gauge the same topic – think housing price inflation.
Again, importantly CPI does not address actual home price increases which as we see actual home price increases, when offered with a broad time perspective, handily exceed the CPI’s measure for housing price inflation.
Actual home price inflation (what people are actually paying for homes and the growth rate of those prices) far exceeds that which has been captured within the CPI measure recently as well more broadly in this 21st century.
The second extraction from the above chart addresses our subject title for today’s edition. As offered, both lines represent the actual index level for both measures. Note how both measures are at all time high levels.
Current day neither has even offered an attempt at say flat lining for a bit which would equate to 0% growth in prices and rent. Rather, both are chugging right long at all time high levels. Interestingly, current day both are very close to one another on their yr/yr percentage growth rates equating to approximately 5 ½%.
This brings us full circle to the outset of this edition along with our subject title question: For the citizen there is a potential downstream damaging price inflation scenario as the Fed is about to embark on an interest rate cutting cycle while price inflation broadly has not been defeated while concurrently housing price inflation measures are posting all time high levels.
Overlaying an incoming Fed interest rate cutting cycle onto housing price inflation measures that are posting all time high levels while also simultaneously posting 5 ½% yr/yr growth rates offers an obvious question when looking downstream on the time line: How is this going to work out?
Can we pour some fuel via rate cuts onto a price inflation fire that is no longer raging but certainly is burning without recreating a price inflation backdrop that the citizenry can ill afford? History offers no but history itself is not infallible relative to using it as a tool for forward projections of current day socioeconomic issues.
If you are rock solid confident that price inflation both generally as well as specifically to housing is done you may want to reconsider that view. This promises to be quite interesting as the time line unfolds. We will share accordingly.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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