Saturday, February 17, 2024
HomeEconomicsThe Grumpy Economist: Residence inflation

The Grumpy Economist: Residence inflation


 

This lovely graph comes from calculatedriskblog.com. (Courtesy Andy Atkeson who used it in a pleasant dialogue of a terrific paper by Ivan Werning on the Minneapolis Fed Foundations of Financial Coverage convention.) 

The central strains that do not transfer a lot are the common lease. That is the amount utilized by the Bureau of Labor Statistics to compute the buyer worth index. The blue and yellow strains are the lease of latest leases. 

The very first thing this informs is the financial idea of “sticky costs.” Residence rents are a traditional “sticky worth;” the lease is mounted in greenback phrases for a 12 months. So, landlords deciding how a lot lease to cost, and other people deciding how a lot they’re prepared to pay,  steadiness rents now vs. larger rents sooner or later. If everybody believes that inflation shall be 10% over the following 12 months, then it is sensible to boost the lease 5% now, and to pay the 5% larger lease, as a result of  the financial savings on the finish of the 12 months steadiness the price to start with. (Clearly, the economics are way more delicate than this, however you get the thought.) And Voila’, you see it. 

The graph additionally says there’s some predictability and nomentum to inflation. Inflation shouldn’t be a shock to forecasters. If you happen to see rents on new leases a lot above common rents, it is a fairly good guess that common rents shall be rising sooner or later! This sort of phenomenon could also be underneath exploited in formal inflation forecasting. 

And, on the persevering with hypothesis whether or not inflation will go away with rates of interest nonetheless considerably under present inflation, the graph does appear a number one indicator that the rational expectations mannequin is profitable.  

Clarification: After all, the graph says nothing about causality; did new leases rise sharply as a result of folks anticipated inflation in common leases, or did new leases rise for different causes, and we’re simply seeing the previous theorem that marginal  > common when common is rising. However it’s in line with the expectations story, and illuminates that story properly. 

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Most Popular

Recent Comments