Monday, February 29, 2016

Fed rate hikes and rents: What Dean Baker says

 - by New Deal democrat

Dean Baker notices that, excluding shelter, consumer prices have only "surged" from negative to +0.4% YoY:

Which still makes YoY inflation ex -shelter still close to its lowest value in 70 years:

He says:

If higher inflation is being driven by rising rents, it is not clear that higher interest rates are the right tool to bring prices down. Every Econ 101 textbook tells us about supply and demand. The main factor pushing up rents is more demand for the limited supply of housing. The best way to address this situation is to construct more housing. 
But housing is perhaps the most interest sensitive component of demand. If we raise interest rates, then builders are likely to put up fewer new units. This will create more pressure on the housing stock and push rents up further.

This is the very point I have been making for the last few months.