Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).
In 1996, when the imputed rent replaced sales trends in the CPI calculation, the government provided evidence that this would have little impact on CPI. However, in Floyd Norris’ column this week What Happens if Inflation Is Overstated? [NYT], he shows that things have changed considerably since then.
- Sales have doubled
- Rents have increased by a third
I commented about this last February in the post At The Core Of Inflation, Housing Sales Are Merely Rentals.
There is the belief that inflation was understated because rentals were weaker than sales during the housing boom and quite possibly the Fed may have been quicker to raise rates to cool off the market. Now with the rental market expected to grow, inflation may be over stated.
Higher interest rates might weaken the economy, but could also help the dollar. Lower rates could hurt the dollar, but also strengthen the economy.
Flexibility may be essential. “If Bernanke commits categorically to a response to core price pressures,” said Robert J. Barbera, chief economist of ITG, “he could find himself raising rates because housing does worse because of the arithmetic of how that plays out in the C.P.I.”
Bernanke may find that making the Fed more transparent, may be easier said than done and Norris concludes that Mr. Bernanke may come to understand why Mr. Greenspan so rarely said anything clearly.