“Bubble Watch” digs into trends that may indicate economic and/or housing market troubles ahead.
Buzz: Inflation hits a 13-year high nationally and locally — minus two months in 2018 — while mortgage rates remain near record lows.
Source: The Consumer Price Index for June.
The trend
The report reaffirmed what just about everybody (minus the Federal Reserve) knows — the cost-of-living is surging higher. Nationally, inflation rose at a 5.4% annual pace; in Los Angeles and Orange counties, it was 4%.
The worst inflation picture since 2008 might nudge the Fed to ease its cheap money policies. Those efforts created an economic oddity — mortgage rates below inflation.
The dissection
Every driver knows a key inflation-fueling culprit: Gasoline is up 40% in L.A.-O.C. and 45% nationally as roads are clogged again. By the way, fuel costs make up only 4% of the overall CPI.
The Fed’s insistence that inflation is not a long-term problem is based primarily on a hunch that many goods and services — gas being a prime example — are far pricier in 2021 only because a year ago — when the economy was locked down — they were so cheap. Consider this a sort of a “back to normal” cost hike.
So let’s ponder other big CPI jumps …
Used cars and trucks: Up 44% in L.A.-O.C. and 45% nationally. (It’s 3% of the index.) Again, this is possibly a temporary issue. With manufacturers challenged to make new vehicles due to parts shortages, used car lots have become the top place to shop for new wheels.
Transportation: Up 18% in L.A.-O.C. vs. 22% nationally (17% of CPI). Another slice of merchants catching up from depressed sales. Everything from plane tickets to rental cars to auto repairs and car insurance is pricier as folks start traveling again for work and play.
Natural gas: Up 11% locally vs. 16% nationally (1% of index). Home-heating fuel also is rising along with gasoline and other energy products.
Electricity: Up 10% locally vs. 3.8% nationally (2% of index). California utility rates are up to compensate for higher costs.
And look at other product categories …
Groceries: Up 3.1% locally vs. 0.9% nationally (8% of index). A reopening economy means supermarkets have to compete a bit more.
Dining out: Up 3.9% locally vs. vs. 4.2% nationally (6% of index). Restaurant owners face rising costs.
Recreation: Up 5.8% locally vs. 2.4% nationally (6% of index). Attractions are now open.
Apparel: Up 4.6% locally vs.. 4.9% nationally (3% of index). In-person work and school means shopping for new clothing.
New vehicles: If you can find one, prices are up 3.3% in L.A.-O.C. vs. 5.3% nationally (4% of index).
Medical care: 0.7% locally vs. 1% nationally (7% of index).
Caveat
Now, there’s still a big question mark. What’s up — or not — with the cost of putting a roof over one’s head? It’s not a small debate as it equals 33% of CPI.
The CPI’s shelter index shows housing costs are up 1.1% locally vs. 2.6% nationally. Many experts think this underestimates the true pocketbook hit of renting or owning. But remember, renter costs typically change annually and ownership costs — not buying prices — are down due to refinanced mortgages.
So housing “inflation” may be coming soon to the index.
How bubbly?
On a scale of zero bubbles (no bubble here) to five bubbles (five-alarm warning) … FOUR BUBBLES!
Rising inflation should mean rising interest rates, but “you can’t fight the Fed!” even if its economy-boosting efforts resulted in distorted housing and stock markets.
I hope the central bankers note this: During the past 50 years, mortgage rates have been above inflation 94% of the time — and 4 percentage points higher on average.
Compare that track record to June being the third straight month inflation was higher than home-loan rates — the 5.4% jump in the CPI vs. the 30-year, fixed-rate mortgage averaging 3%.
That 2.4-point gap is the biggest inflation-above-mortgages difference since December 1974 — when a 12.1% CPI jump topped 9.6% home-loan rates!
Jonathan Lansner is business columnist for the Southern California News Group. He can be reached at jlansner@scng.com
