Inflation and housing: proceeding as predicted

CNBC examines the prospects for higher inflation in future.  Despite working from the foundation of the 'official' (and, in my opinion, unreasonably low) rate of inflation, it foresees a rise in prices.  Here's an excerpt.

Higher inflation that's to come will mean still-tough times for savers and retirees, whose money has generated little return since the Fed took over the post-crisis economy.

After pulling the U.S. economy back from illiquidity and indeed the brink of insolvency during the 2008-09 dark days of the financial crisis, the Federal Reserve has been on a thus-far fruitless crusade to generate positive levels of inflation.

That's the kind that comes when the economy is growing and worker paychecks are able at least to approach the pace of price increases.

. . .

In the interim, savers have suffered under the yoke of low interest rates that have helped finance the U.S. debt load while stock market speculators have reaped a bonanza.

But with interest rates accelerating, the economy growing and the Fed charting a course to exit its historically easy monetary policy, the inflation picture could begin changing.

Economist David Rosenberg, who also serves as strategist at Gluskin Sheff, believes the day is near when inflation starts coming alive, and with little benefit to those not in the risky end of the financial markets. In fact, he thinks a mild stagflation—high unemployment and inflation—is in the cards.

. . .

[Rosenberg says] "The Fed and other central banks are hardly going to be touching short-term interest rates, which will remain negative in real terms for years. So financial repression will remain the order of the day, until the Fed gets what it wants – which is inflation expectations heading up to 2.5 per cent."

The practical impact of that level will mean a 30 percent increase in consumer prices over the next 10 years.

There's more at the link.  Bold, underlined text is my emphasis.

I don't believe for a moment that it'll take 10 years for the average consumer to see a one-third rise in prices.  I've seen that in my shopping basket in the past three to four years!  I expect prices to rise by anywhere between 50% and 100% in the next decade, thanks to the chaos that the Fed's quantitative easing programs will leave behind.

(Of course, a lot will depend on where you live.  A very useful infographic from Visual.ly points out that the cost of living in America's cheapest city is little more than a third as much as it is in the country's most expensive city.  Inflation will raise both costs of living, but by a lot less in the location that's cheaper to begin with.  Recommended reading.)

The housing market is also in the doldrums again, despite all the hype in the popular press trying to pretend it's doing just fine.  I wrote about this last month.  Now comes the news that mortgage demand appears to be collapsing.  Zero Hedge reports:

About an hour ago, Bank of America served the latest indication that the US housing "recovery" (also known as the fourth consecutive dead cat bounce of the cheap credit policy-driven housing market in the past five years) may be on its last breath. Namely, the bank announced that it will eliminate about 2,100 jobs and shutter 16 mortgage offices as rising interest rates weaken loan demand, said two people with direct knowledge of the plans and reported by Bloomberg. In some ways this may be non-news: previously we reported, using a Goldman analysis, that up to 60% of all home purchases in recent months have been [in cash], which of course shows just how hollow the "recovery" has been for the common American for whom the average home has once again become unaffordable. However, judging by an update presentation given earlier today by the CFO of none other than JP "fortress balance sheet" Morgan, things are rapidly going from bad to worse for the banking industry as a result of the souring mortgage market for which, absent prop trading, loan origination is the primary bread and butter.

Again, more at the link, including useful graphs illustrating the problem.

All this presumes, of course, that the economy doesn't go into meltdown due to a sudden, unexpected development - something which remains a distinct possibility.

Peter