Thursday, January 16, 2014

"The Inflation to Come in Housing, Healthcare and Wages," UCLA Economic Letter, January 2014

 For the past year, U.S. inflation has remained at very low levels. But that is about to change, led by price increases in housing and healthcare, and by modest wage increases. And that will eventually cause the Fed to abandon its zero interest rate policy.

“Rent controlled jurisdictions (i.e. New York, Los Angeles, San Francisco and Washington, D.C.) are over- weighted in housing price indices. As a result, housing inflation will accelerate as controlled rents are marked to market through vacancy decontrol. Furthermore, 2014 will bring with it the eighth year of under-building.”

As a result, the combination of higher housing costs, a modest snap back in health care inflation and moderate wage increases will soon push inflation up from the extraordinarily low level of the past year. Instead of having a very low inflation rate of 1%, we will soon be witnessing a low inflation rate of 2%. The Fed wants this increase and it will get it. The uptick in inflation combined with an improving labor market will cause the Fed to abandon its zero interest rate policy in early 2015.

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