Don't Let Inflation Break Your Brain

The economy is in pretty great shape.

A lot of economists and finance people went wild over Tuesday's inflation report, which showed consumer prices running well ahead of what most forecasters had been anticipating. Some of the numbers aren't great, but the freakout is overblown. On the whole, the report is good news, and suggests that the U.S. economy is emerging from the pandemic in far better shape than reasonable people could have expected a year ago.

Inflation hawks had their feathers ruffled by the headline numbers. The Consumer Price Index was up 0.9 percent in June -- a lot for one month. Prior to the pandemic, the Fed had been targeting annual inflation of 2 percent for several years (the Fed uses a different inflation index, but you get the idea). What's more, while wages have been up this year, the latest inflation data makes clear that price increases this year have outpaced the rise in worker pay.

In general, that's bad: households are in effect making less money. But in this case, the details of the report show a much more rosier picture for just about everyone who isn't in the market for a used car.

More than half of the overall consumer price increase in June came from cars, with about three-fourths of that automobile jump attributable to used cars, which saw their biggest one-month gain since 1953. If you needed to buy a car last month, you got screwed.

Fortunately, the vast majority of households didn't buy a car last month, and most of the other price increases are a good sign for the economy, since they were concentrated in the vacation and leisure sector that got wrecked worst during the pandemic: air fare, restaurants, and hotels. Subtract cars and the vacation industrial complex, and total inflation for June was just 0.2 percent. 

Better news still is that wage growth has been concentrated in sectors where people generally don't get paid very well. Wages in retail, restaurants and hotels are way up this year, with hourly pay for non-management workers in the leisure and hospitality sector up 10.5 percent over the past six months.

So lower-income people are getting paid more, hard-hit sectors are recovering, and expenses for the vast majority of households look pretty tame. Working people are getting much more out of this recovery than they did from the last one. This is all good news.

An important exception is housing, which accounted for about 0.1 percent of the 0.9 overall June inflation jump. That's not a crazy number, but it understates the severity of the issue. Most households aren't going to buy a car this year, but nearly all will pay rent or a mortgage every single month, and housing is the largest monthly expense in the vast majority of household budgets. So a sustained rise in rent hurts a lot more than a sustained rise in grocery prices.

And rental inflation is not even across the county. Some places aren't seeing much at all, but more than a dozen cities have seen rents rise by 10 percent or more this year, and there is reason to believe they'll continue to climb in the second half of the year. In the neighborhoods where rent hikes are a problem, they’re a big problem.

There are a lot of reasons why housing has been too expensive in the United States for decades, but the primary reason housing prices are going up right now is probably the pandemic. People are getting new jobs, upgrading thanks to better pay, downgrading due to a layoff, or just plain packing up and leaving town after the pandemic forced them to re-evaluate their situation. And there have been problems with home construction due to various supply chain jams and short-term labor shortages in different regions.

But even if the pandemic is largely responsible for the recent spike in housing costs, families still have to pay for it. Landlords don't usually lower rents after they go up, regardless of why they raised them. I'm agnostic about the details, but now would be a very good time to get a national rent policy together.

And with that, I'll take Pepper for a walk.