Monday, March 27, 2023
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The Grumpy Economist: House inflation


This stunning graph comes from (Courtesy Andy Atkeson who used it in a pleasant dialogue of an awesome 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 hire. That is the amount utilized by the Bureau of Labor Statistics to compute the patron value index. The blue and yellow strains are the hire of recent leases. 

The very first thing this informs is the financial concept of “sticky costs.” House rents are a traditional “sticky value;” the hire is fastened in greenback phrases for a 12 months. So, landlords deciding how a lot hire to cost, and folks deciding how a lot they’re prepared to pay,  steadiness rents now vs. increased rents sooner or later. If everybody believes that inflation shall be 10% over the following 12 months, then it is sensible to lift the hire 5% now, and to pay the 5% increased hire, as a result of  the financial savings on the finish of the 12 months steadiness the fee to start with. (Clearly, the economics are rather more delicate than this, however you get the thought.) And Voila’, you see it. 

The graph additionally says there may be some predictability and nomentum to inflation. Inflation shouldn’t be a shock to forecasters. In the event you see rents on new leases a lot above common rents, it is a fairly good wager that common rents shall be rising sooner or later! This type 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: In fact, the graph says nothing about causality; did new leases rise sharply as a result of individuals 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 per the expectations story, and illuminates that story properly. 



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