- by New Deal democrat
Should the Fed raise rates when inflation is being driven exclusively by a necessity, and demand for that necessity is being driven by demographics?
Just as with Boomers 50 years ago, the Millennials have reached the age where they are moving into their first residences. This has created a boom in multi-unit dwellings:
and has driven median asking rents to record inflation-adjusted highs.
At the same time, the CPI less shelter is the most negative it has been in 60 years (-1.3%) excluding the bottoms of the 1950 and 2009 recessions. In other words, the only important driver of inflation right now is Owner's Equivalent Rent, as shown in this graph comparing CPI for housing (red) with CPI for everything else (blue):
Notice what happened from the late 1960s through the early 1980s as the Boomer generation reached initial apartment/home buying age. The same contrast is appearing now.
Last I checked, shelter is a necessity. So we have this huge demographic creating an increasing demand for shelter, which is driving up prices and construction, to alleviate the shortage.
If the Fed raises rates, all they are doing is making the shortage more acute (because shelter is a necessity and ultimately the demand must be filled), and hurting Millennials in the process. Further, all that does is set the stage for even more inflation for shelter later on in the next recovery, just as it did in the 1970s.
In my opinion the Fed should relax its inflation target, specifically as to shelter, to accommodate this secular demographic need. As to everything else, at the moment inflation is a dead as the fabled parrot in the Monty Python sketch.
