Monday, February 22, 2021

While many areas struggle, prices are jumping in housing, stocks and the gas pump

While stimulus is still badly needed in a country that has tens of millions of Americans receiving unemployment benefits each week, there is another side of things if the economy starts doing too well due to efforts to battle the depressed economy. And that would be reflected in Bubbly asset prices and overall inflation. We know that the stock and housing markets are showing gains that are well out of whack with the performance of the overall economy, and a couple of reports from this week show other sectors with price increases.

Low interest rates and possibly COVID effects have combined to cause a boom in housing prices. This is true nationwide (as shown by the 14% rise in median home prices over the last 12 months), and also in Wisconsin, as the Wisconsin Realtors Association reported today.
Following a record year for home sales in 2020, the Wisconsin existing home market started the new year on record pace even as inventories continued to tighten statewide, according to the most recent analysis by the Wisconsin REALTORS® Association (WRA). January home sales increased 9.8% compared to that same month last year, and the median price rose 10.5% to $210,000 over that same period. This established a new January record in Wisconsin for both home sales and the median price, according to the report.

“January is typically the slowest month of the year, so it’s encouraging to see such a strong market to start 2021,” said WRA Board Chair Mary Duff. In a typical year, the month of January accounts for just 4.8% of annual sales. In contrast, sales usually peak in June, and the volume is nearly two and half times greater, accounting for 11.6% of sales. Duff cautioned that the record pace is unlikely to continue due to a severe shortage of homes for sale. “Unfortunately, January ushered in another Wisconsin record, and that’s record-low inventories,” said Duff. There was just 2.1 months of available homes for sale in January, down from 3.5 months a year earlier. The last time there was a balanced market in the state was in summer 2017 when there was about six months of supply, and it has been a seller’s market ever since. “Going forward, we may be able to surpass the depressed level of home sales last spring, but we will struggle to keep pace with 2020 unless inventories improve,” said Duff.
It's remarkable that this big jump in home prices and sales is happening at the same time that millions of Americans continue to receive unemployment benefits, and are living paycheck to paycheck.

And Oil prices have also been climbing, and the recent cold snap in Texas is making it go up even more.
Oil prices rose nearly 4% on Monday, boosted by the expected slow return of U.S. crude output after last week’s deep freeze in Texas shut in production.

U.S. producers shut anywhere from 2 million to 4 million barrels per day of oil output due to cold weather in Texas and other oil producing states, and the unusually cold conditions may have damaged installations that could keep output offline longer than expected.

Brent crude settled at $65.24 a barrel, rising $2.33, or 3.7%, while U.S. oil settled at $61.49 a barrel, jumping $2.25, or 3.8%. The U.S. benchmark crude contract for March delivery expires on Monday, and the more widely-traded April contract was up $2.44, or 4.1%, at $61.70 a barrel.
That will likely keep the consumer price index on the rise for the near term, and will go on top of something else that will keep the "surging inflation" memes going in the next few months. That's the year-over-year numbers, which will start spiking up because they'll be compared to the depths of the COVID-related shutdowns last Spring.
You can see where even if we have modest price rises in each of the next 3 months, the year-over-year numbers will likely be between 3%-4%, which would be the highest in nearly a decade. One other area seeing notable price changes in recent weeks is in food. The overall change in producer prices for foods in January 2021 was a relatively tame 0.2%, and 1.4% over the last year. But there has been a wide variation in what went up and what went down, including one product with particular salience to Wisconsin who has seen prices go back down recently.
So mixed bag there, but major inflation in some foods combined with declining prices in some others (with near-term milk futures back down to the bad old days of 2019's farm crisis) means that there are going to be a lot of people falling behind both on the farm and in the grocery store.

While inflated prices overall are certainly something to keep an eye on, the top priority for the US economy at this point still needs to be stabilizing the economic fortunes of the tens of millions of Americans going through hard economic times. This can be done both by containing COVID-19 to reduce the number of Americans who choose to remain socially distant, and by stimulus measures to keep Americans from going over the edge of economic despair. However, we also need to make sure prices don't go up so far that the typical American begins to find housing, food, or gas to be near unaffordable, or that other segments of the economy lose demand because so much is being sucked up by staples.

To me, the better way to keep the economy growing but in balance at this time is not to hike interest rates to the point of recession, but to limit these asset and commodity bubbles by raising taxes on the super-rich, possibly combined with stock-trading tax, in order to put a lid on speculation that makes it more likely that these inflated assets crash and set off a chain-reaction in other economic sectors.

After all, you can't eat stocks or houses, and using them to borrow against and pay off the rest of your bills isn't sustainble, and will end very badly in a time when so many Americans can't afford to have anything else go badly.

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