Discussion: Core PCE Price Index MoM increase in August is 0.6%. That's 7.2% annualized!

[moes]

For all the experts saying deflation is in the pipeline because most commodities are down - this is not how inflation works.

Core PCE Price Index excludes volatile prices of energy and food.

Once inflation gets entrenched in the services sector and in wages growth it's no longer about raw input material costs. People like Cathie Wood and Elon Musk have strong public voices but they seem to not know how exactly inflation is working. Once inflation spreads the only way of stopping it is causing what FED is currently doing. It's like a virus - if you don't kill it completely it'll recover and spread even more.

Sadly, I don't see a way to stop inflation without causing recession and widespread decrease in spending. Generally speaking, we need much better monetary discipline and tools to fight such events. IMO, with what we have today, FED is taking the right actions. I just hope what they are doing will be enough...

 

[jbekoe]

@moes The argument people have for deflation, that I share, is that housing is almost half of core PCE. Housing is a super lagging indicator and most of the crazy runnup in housing/rent prices over the past two years is still being incorporated into these measurements.

In real time you can see any number of articles recently about how rent/housing has peaked and housing prices have started to fall pretty fast in July/August

This adds up to a conclusion by some that if you used updated real time housing/rent prices you would see the fed is successfully fighting inflation right now and its insistence that it is not and needs to raise rates further is going to overdo the fighting and we’ll have deflation statistics come out in another year or so

 

[kexonplastic]

@jbekoe Was at an event with a lot of affluent adults last weekend. Several of them are currently building houses. Their plan on interest is converting the construction loans into interest only balloon mortgages. Refinance when rates go back and they are fine.

I don't see how that can backfire at all.

 

[worthlessone]

@kexonplastic Damn. I hope that's not the case across the states.
Quick question, when they convert those construction loans into interest only , are the rates variable or fixed?

I guess if they're cash rich and did the calculations on how many months they can pay...they're fine. Wait. If they're cash rich they probably wouldn't need to do interest only loan unless they were able to secure an absurdly low rate.

 

[kexonplastic]

@worthlessone I think they can be either. I am not well-versed in balloon mortgages though because I think they are typically a terrible idea.

 

[worthlessone]

@kexonplastic Ah ok. If they're able to lock in at less than 1 or 2 % rate, it's actually worth it. Opportunity cost and all. They can just deposit that amount and make more interests. (Ibond pays near 10%, t-bill/notes are paying around 4%.)

Aside from that, Im with u on its a bad idea. Bleeding on interest payment with economies like this, it's hella scary. I don't know how I'd sleep at night if the housing price drops 20-30% below my cost while I'm paying interest only.

 

[kexonplastic]

@worthlessone The numbers they were quoting were 4% - 5%.

Outside of the crazy world of auto financing you aren't going to see rates below the risk free rate.

 

[shanew711]

@kexonplastic You don’t understand. All their friends bought houses so they’ll look poor if they don’t buy one, too. /s

 

[rainflower]

@jbekoe Sure, housing prices are beginning to decrease, but with rates raising it’s not necessarily becoming more affordable. If the demand for purchasing homes goes down, then the demand for rent must go up. I haven’t heard or read anything about rents going down, quite the opposite.

 

[seekinghimtruly]

@jbekoe Yeah, there was also an interesting Fed paper about how young people moving in with parents during COVID depressed rental prices, but now these people all got better jobs and are moving back out spiking rental demand. Meanwhile real estate prices haven't adjusted to rising rates yet, meaning people don't want to buy which is further pushing up rental demand. Also seasonally this is historically an expensive time of year for rent... So there are a bunch of temporary pressures on housing costs that we should see some relief from in the near future, especially if wage growth slows. The paper also mentioned that minimal immigration during COVID has greatly reduced population growth projections which could also provide some long term relief on housing costs.

 

[skim]

@jbekoe I would argue that because the owners equivalent rent calculation for housing values ignores the affect of rising mortgage rates, the official statistics don't reflect how the affordability of housing has deteriorated at a rapid rate despite the sticker prices of homes plateauing.

Case-Shiller is down a whopping 1/3 of a percent in July from its June all time high so how much relief is that really.

 

[boader558]

@jbekoe I just don’t see deflation occurring.

 

[lroe50f]

@jbekoe I think housing is usually excluded from these indicators

 

[bonzo1953]

@moes Speaking of things that are “not how inflation works” - you don’t annualize a monthly number and use that to justify your long-term inflation views. Just like core PCE being 0 in July didn’t mean longer-term inflation disappeared