Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Home Prices Keep Rising Despite Cooling Inflation
Transcript
- Lucas: So here's something that doesn't quite add up. Headline CPI has been cooling — we're at 332.4 on the index as of April. Core CPI is similar. The ten-year breakeven inflation rate is down to 2.38. And yet, if you're a renter or a would-be homebuyer, your personal inflation rate probably feels like it's still running hot. Why? Luna: Because shelter is the single biggest component of CPI — it's about a third of the index. And that part is not cooling nearly as fast. Lucas: Exactly. The shelter sub-index includes both rent of primary residence and owners' equivalent rent — that's what homeowners would pay if they rented their own home. And it's been sticky in the low four percent year-over-year range for months. The April data showed owners' equivalent rent up 4.2 percent year-over-year. That's down from the peak, sure, but it's not dropping quickly. Luna: And the Fed's rate stance — effective rate at 3.64 percent, flat for months — isn't exactly lowering mortgage costs. Thirty-year fixed mortgages are still above six and a half percent. Lucas: Right. So you have a situation where the Fed is holding rates high to fight inflation, but the main driver of inflation — shelter — is being propped up in part by those same high rates. Because high mortgage rates lock in existing homeowners — they don't want to sell and give up their low-rate mortgage. That reduces supply of existing homes, which keeps prices elevated. And that feeds into rent, because if buying is unaffordable, more people rent, pushing rents up. Luna: It's a circular problem. And the market is pricing in that shelter inflation will stay persistent. The ten-year breakeven at 2.38 — that's the bond market's expectation for average inflation over the next decade. But if shelter doesn't cool, that number could be too low. Lucas: Which brings us to a fascinating data point from this morning. Berkshire Hathaway just made a six point eight billion dollar bet on housing. They're acquiring Taylor Morrison, a homebuilder. That's a signal from Warren Buffett that he believes home prices and demand have further to run. If the most value-conscious investor in history is buying homebuilders, the market is saying shelter inflation isn't going away soon. Luna: So what does this mean for the average listener? If you're sitting on cash waiting for housing to become affordable, you might be waiting a while. Lucas: I think the takeaway is to think about your personal inflation rate versus the headline. The CPI might say inflation is around three percent, but if you're in a city where rents are up six percent, your personal rate is higher. That affects how you invest your emergency fund, how you think about wage negotiations, and whether you consider locking in a fixed-rate mortgage now versus waiting. Luna: And that's actually why we do this show — to help people navigate those real-world decisions. Which reminds me — we don't run ads. Never have. So if you've found this conversation useful, and you want to support keeping it that way, you can buy me a coffee dot com slash fexingo. It's a simple way to back what we do. Lucas: Yeah, it's just a listener-supported model. No sponsors, no pressure. But every contribution helps us keep the lights on and the scripts coming. Luna: Exactly. Now, let's dig deeper into what the PCE price index tells us, because that's the Fed's preferred inflation gauge. It came in at 130.9 in April, up from 130.38. That's a month-over-month increase of about 0.4 percent annualized — not alarming, but not dovish either. Lucas: And the core PCE — which excludes food and energy — is running around 2.7 percent year-over-year. That's above the Fed's two percent target. So the Fed is stuck. They can't cut rates until shelter inflation eases, but high rates are part of what's keeping shelter inflation elevated. It's a Catch-22. Luna: There's another angle here. The GDPNow tracker for Q2 is pointing to around two percent growth. The economy isn't collapsing. So the Fed has room to hold steady. But the longer they hold, the more entrenched the supply constraints in housing become. Lucas: And that's the real story. Inflation isn't just a monetary phenomenon anymore — it's structural. The housing shortage predates the pandemic. We underbuilt for over a decade after 2008. Now we're feeling it. The Berkshire Taylor Morrison deal is a bet that the shortage will persist. And for listeners, the question is: how do you protect your purchasing power in that environment? Luna: One traditional hedge is real assets. But not everyone can buy a house. So what can you do? Lucas: REITs are one option. Some residential REITs have been performing well because rents are still rising. But you have to be selective — not all REITs are created equal. Another is TIPS — Treasury Inflation-Protected Securities. The ten-year TIPS yield is around one point two percent real. That's not a home run, but it's positive real return, which is better than cash earning zero. Luna: And we should mention that gold has had a strong run — it's at $4,547 an ounce as of this week, up over two percent in five days. But gold is volatile and doesn't produce income. It's more of a tail-risk hedge. Lucas: Right. For most people, the best inflation hedge is still your own human capital — investing in skills that allow you to negotiate raises that keep up with inflation. Because if shelter inflation is running at four percent and your raise is three percent, you're losing ground. And that's the quiet erosion that doesn't show up in the headlines. Luna: So, to tie it back to the data: the headline CPI is 332.4, core is 335.4. Shelter is the stubborn component. The Fed is at 3.64 percent and not moving. Berkshire is betting big on housing. The listener should not assume inflation is solved. Lucas: Exactly. Inflation is moderating, but it's not normalizing in a way that makes everyone feel better. The mix matters. And for your personal finances, you have to look at your own consumption basket, not the national average. Luna: Alright, next episode we'll talk about whether the recent rally in small caps — the Russell 2000 is up almost two percent in five days — is sustainable, or if it's just a rotation trade. Lucas: That's a great topic. The Russell closed at 2,919 on Friday. That's near its highs for the year. But small caps are more sensitive to interest rates, so if the Fed doesn't cut, that rally could stall. See you next time. Luna: Thanks for listening.