Tuesday, April 15, 2014

Will The Rise In Home Prices Increase US Inflation?

Core inflation, which excludes food and energy price changes, is the inflation rate that the Fed uses to adjust interest rates.  Since home prices are over 40% of core inflation, one would expect that they are highly with core inflation.  This graph shows that core inflation rates tend to lag changes in home prices.  The growth in home prices has been accelerating.  This suggests that we should soon see an increase in core inflation that might trigger the tightening of monetary policy in the US. 

However, there are a lot of other factors which affect the inflation rate.  Wage inflation is usually associated with rising prices.  We are not witnessing wage inflation yet in the US.  Wage inflation does not usually occur when we have high unemployment rates.

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