Opinion: Inflation, like an army of termites, has burrowed its way into the biggest item in the typical family’s budget—putting a roof over their heads. And the Fed can’t fix it.

While the pace of consumer price inflation cooled slightly in April, don’t think for a minute that US inflation problems are a thing of the past. Gasoline prices may have temporarily eased in April, but the prices of the things that really matter most (shelter, food, and medical care) are still very hot.

Housing costs rose at an annual rate of 6.4% in April. Food prices rose at a rate of 10.9%. The prices of out-of-pocket health care, which had been fairly quiet for much of the pandemic, rose at a rate of 5.5%.

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These three items account for about 55% of the typical household’s monthly budget, and inflation is accelerating in all three. By 2022, housing costs are rising at the fastest pace in 31 years, food prices are rising at the fastest rate in 41 years, and health care prices are rising at the fastest pace since the pandemic .

Housing costs are the most important part of the family budget, and they are rising rapidly.


Harder to fix

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At first, he took the news well, but the Federal Reserve will not like this report of the consumer price index at all.

Of course, the year-on-year inflation rate fell from a record high of 41 years, but the report confirms that inflation is moving away from goods, where prices tend to rise or fall from one end to the other. services, where prices are slower to move, but rarely reverses course (who has heard of someone lowering rent?).

This means that inflation, once integrated, is more difficult to eliminate.

Prices for services, which account for 60% of consumer spending, rose at an annual rate of 5.4% in April, the fastest pace since 2001. On the other hand, the price of goods, which had risen a record 14.2% in the 12 months prior to March. , fell at an annual rate of 3.5% in April.

The April CPI adds further confirmation that inflation, like a termite army, has gone into the most important part of the typical family budget: putting a roof over your head. The cost of buying or renting a home is one-third of the typical family budget (and for low-income families, it is often half or more of their disposable income).

Read more: “Anyone who is middle class and below, we’re fucked”

These costs, which the Bureau of Labor Statistics calls “rental housing,” have risen at an annual rate of 6.3% so far this year. This is the fastest increase in four months since 1991. Over the last 12 months, house rents have increased by 5.2%, also the largest increase in more than 30 years.

Mismatch between supply and demand

And that’s a major concern for Fed policymakers, because raising interest rates and lowering the central bank’s balance sheet can’t solve the underlying mismatch in supply and demand under protection: everyone has to sleep under one roof, but none. enough to go.

Undoubtedly, easy monetary policy has contributed to the supernatural rise in house prices over the past two years. Rising interest rates and the cut in Fed property ownership will certainly help curb effective housing demand and, with it, the meteoric rise in house prices.

All the Fed really does by raising rates is increase the cost of capital to buy or build a home, either to live on one or to rent to others. This cannot solve the problem in the long run because it reduces supply and demand.

The Fed can’t build more houses and apartments in places where people want to live. Rising cost of capital will ultimately reduce construction, which will increase the pressure on existing inadequate supply.

Solving our inflation problems ultimately depends on increasing supply, but that’s not something the Fed can do.

More on inflation

There’s a big hole in the Fed’s inflation theory: revenue is falling at a record 10.9%

Inflation inequality is hitting the working class harder than at any other time

Gasoline prices have risen sharply, but the actual cost of driving a mile was higher for most of the last century.

Why interest rates are not really the right tool to control inflation

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