Housing.com News, Analysis & Opinion: Credit & Debt: Inflation Pressures Increase

Apparently all of the stabilization in gas prices didn't really account for much, as wholesale price inflation is increasing at a rapid pace:

Economists had been expecting a rebound in wholesale prices following two months of big declines. However, the 2 percent jump was four times bigger than the 0.5 percent increase they had forecast. Even excluding volatile energy and food prices, core inflation posted a 1.3 percent advance, the biggest jump in 26 years....The increase in the core rate of inflation was led by a record 13.7 percent jump in the price of light trucks, a category that includes sport utility vehicles. The price of new passenger cars rose by 2.2 percent.

Hey, here's a thought--maybe if you STOP BUYING GAS-GUZZLING SUVs, we won't consume as much oil and be on OPEC's johnson for the rest of eternity.

Anyway, what does this mean for housing? Will Bernanke push to raise or lower rates in 2007? Right now, it seems like there may indeed be a bottoming out, as evinced by Tim Duy's quoted comments at Economists' View:

Regarding housing, I don’t feel a need to chronicle the housing market’s decline – no need to recreate Calculated Risk’s efforts. I will only add that from the Fed’s perspective, the slide in new residential investment will not go on forever. There is a bottom. And when that bottom is reached, then the contribution to GDP growth will go from a negative 1.2% to zero. This would, for example, have made Q306 GDP growth 3.4% instead of 2.2%. And 3.4% is well above the Fed’s estimate of potential.

Now, they don’t really believe that the economy will snapback to 3.4% on average – and if it does, we should be expecting additional rate hikes. I think they believe the mortgage equity withdrawal story, and anticipate an Act II to the housing slowdown. In Act II, the drag from the consumer becomes more evident, pushing consumption growth rates to the 2-3% range.

I recommend reading the whole piece, as it's a reasoned take on our economic outlook that doesn't fall into hysteria, but also does not deny the realities of our situation.

1) China's currency strategy has helped produce rapid growth for 30 years; therefore it should be abandoned.
2) China's high savings rates have been a key to this success; therefore they should be reduced.
3) China, a country emerging from communism, should spend more on public health and social security, so that ordinary Chinese can save less. (This is actually a good point, as far as it goes.)
4) The United States, a capitalist country, should spend less on social security and public health, so that ordinary Americans will be forced to save more.
5) Somehow, all this will reduce the deficit in the US-China balance of trade, a goal whose importance everyone agrees on but that no one can actually explain.

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Apparently all of the stabilization in gas prices didn't really account for much, as wholesale price inflation is increasing at a rapid pace: Economists had been expecting a rebound in wholesale prices following two months of big declines. However, the 2 percent jump was four times bigger than the 0.5 percent increase they had forecast. Even excluding volatile energy and food prices, core inflation posted a 1.3 percent advance, the biggest jump in 26 years....The increase in the core rate of inflation was led by a record 13.7 percent jump in the price of light trucks, a category that includes sport utility vehicles. The price of new passenger cars rose by 2.2 percent. Hey, here's a thought--maybe if you STOP BUYING GAS-GUZZLING SUVs, we won't consume as much oil and be on OPEC's johnson for the rest of eternity. Anyway, what does this mean for housing? Will Bernanke push to raise or lower rates in 2007? Right now, it seems like there may indeed be a bottoming out, as evinced by Tim Duy's quoted comments at Economists' View: Regarding housing, I don’t feel a need to chronicle the housing market’s decline – no need to recreate Calculated Risk’s efforts. I will only add that from the Fed’s perspective, the slide in new residential investment will not go on forever. There is a bottom. And when that bottom is reached, then the contribution to GDP growth will go from a negative 1.2% to zero. This would, for example, have made Q306 GDP growth 3.4% instead of 2.2%. And 3.4% is well above the Fed’s estimate of potential. Now, they don’t really believe that the economy will snapback to 3.4% on average – and if it does, we should be expecting additional rate hikes. I think they believe the mortgage equity withdrawal story, and anticipate an Act II to the housing slowdown. In Act II, the drag from the consumer becomes more evident, pushing consumption growth rates to the 2-3% range. I recommend reading the whole piece, as it's a reasoned take on our economic outlook that doesn't fall into hysteria, but also does not deny the realities of our situation. And speaking of denying reality, Economists' View also gathers James Galbraith's hilarious take on Bernanke-nomics: So here's the Bernanke-Paulson position in brief summary: 1) China's currency strategy has helped produce rapid growth for 30 years; therefore it should be abandoned. 2) China's high savings rates have been a key to this success; therefore they should be reduced. 3) China, a country emerging from communism, should spend more on public health and social security, so that ordinary Chinese can save less. (This is actually a good point, as far as it goes.) 4) The United States, a capitalist country, should spend less on social security and public health, so that ordinary Americans will be forced to save more. 5) Somehow, all this will reduce the deficit in the US-China balance of trade, a goal whose importance everyone agrees on but that no one can actually explain. Here's a simpler version: 1) Put China in debt through excessive credit and consumption 2).... 3) Profit!