First part ; The economic fireworks were in housing!

by Risk calculated on 07/03/2023 10:23:00

Today, in the Calculated Risk Real Estate Newsletter: Pandemic economics, housing and monetary policy: part one

A brief excerpt:

The economic results of the pandemic were often largely unexpected.

For example, at the start of the pandemic, there was a shortage of toilet paper. Since there are two supply chains for toilet paper – one residential and the other commercial – and many more people used the bathroom at home than in the office, there was a shortage of residential toilet paper. …

More generally, in 2020 we saw an increase in spending on goods as many services were closed. With fiscal policy supporting incomes, increased demand for goods eventually led to higher prices as inventories were depleted.

The chart above shows that goods prices started to increase year-on-year (YoY) in 2020 and accelerated in 2021 due to both strong demand and supply chain disruptions. ‘supply. …

In his testimony todayFed Chairman Powell clearly does not view services inflation as transitory:

That said, there is few signs of disinflation so far in the non-housing basic services category, which accounts for more than half of basic consumer spending. To restore price stability, we will need lower inflation in this sector and there will most likely be an easing of labor market conditions.

…the latest economic data is better than expected, suggesting that the ultimate level of interest rates will likely be higher than expected. If all the data were to indicate that a faster tightening is warranted, we would be ready to accelerate the pace of rate hikes. Restoring price stability will likely require us to maintain tight monetary policy for some time.
added emphasis

It is clear that Powell believes that price increases related to services will not be as transitory as goods and commodities and will require “some easing of labor market conditions”. The FOMC has made a clear commitment to raise rates further to curb inflation.
…
In Part III’m going to discuss what I think will happen with housing going forward and – since housing is the main transmission mechanism for monetary policy – ​​the implications for Fed policy. I’m going to suggest a few non-consensus possibilities!

There is a lot more in the article. You can register on https://calculatedrisk.substack.com/