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Sept. 28, 2022, 8:35 a.m. EDT

The Fed has won a major battle against inflation but doesn’t believe it because the data have a fatal flaw

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By Rex Nutting

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The assumption that homeowners are just like renters is wrong. For renters, shelter costs account for about 34% of their out-of-pocket spending each year, according to the Bureau of Labor Statistics’ consumer expenditure survey. For homeowners with a mortgage, it’s 27%. For homeowners without a mortgage, it’s 21%. And remember, homeowners also accumulate equity.

Any assumption that the cost of living of the 84 million families that own their home should be measured by what the 47 million who rent pay is not just ridiculous, it’s fatally flawed. In times of low inflation, it might be acceptable, but in times of high inflation, this assumption is sending out a misleading message.

The price of renting a house of apartment doesn’t track the price of buying perfectly, and tends to lag behind by 12 to 18 months. This means that the drop in home prices in July (and beyond, presumably) won’t really be apparent in the price of renting until next summer. And it won’t fully show up in the inflation data until then either.

Higher for longer

The Fed’s policy is to keep raising rates until the inflation data tell them to stop. But that policy is inherently backward-looking. It means the Fed is likely to brush aside any signs of progress in tamping down inflation expectations, or in tapering effective demand by destroying wealth and slowing the growth of incomes.

It means that an unnecessarily hard landing is likely, with more pain to the American economy and its people that is necessary. Not to mention what it’s doing to t he rest of the world.

Rex Nutting is a columnist for MarketWatch who’s been writing about the economy for more than 25 years.

More by Rex Nutting

Americans are feeling poorer for good reason: Household wealth was shredded by inflation and soaring interest rates

Almost all the economic numbers are aligned: A U.S. recession is now likely

Home prices have risen 100 times faster than usual

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