What Skyrocketing Home Prices Say About Inflation

Anyone who says inflation isn’t a problem hasn’t tried shopping for a new home recently.

Housing costs are skyrocketing. The median sales price of existing homes has spiked 16% over the past 12 months (from $270,400 to $313,000) – the fastest pace in 15 years.

The real estate market is being pressured not only by low inventories of houses listed for sale but also by rising prices for construction materials.

Homebuilders must deal with a massive 200% increase in lumber costs since the onset of the COVID-19 pandemic. According to the National Association of Home Builders, lumber’s elevated price adds about $24,000 to the final quote on a typical new single-family home.

Meanwhile, steel, copper, cement, and other basic materials aren’t getting any cheaper. Copper ran up to a multi-year high earlier this year, and mining analysts warn of supply shortfalls in the months ahead.

Fed’s Powell Wants to See Inflation Move Up ‘For Some Time’

Federal Reserve Chairman Jerome Powell dismisses these inflationary pressures as transitory. He actually wants to see consumer and producer price rises sustained over a longer period.

Powell said in an interview that aired Sunday on 60 Minutes, “We want to see inflation move up to 2%. And we mean that on a sustainable basis. We don't mean just tap the base once. But then we'd also like to see it on track to move moderately above 2% for some time.”p />  

Of course, the federal government’s inflation readings notoriously understate true inflation. But parts of the economy are already grappling with costs running well above 2% even when using the official numbers.

However, the Fed's inflation gauge – riddled with questionable weightings and various adjustments – currently shows broad prices levels rising by less than 2% annually.

By the time central bankers recognize inflation is running significantly above 2%, they will likely be way behind the curve when it comes to a policy response.

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