How Higher Priced Homes and Technology Killed Inflation:
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Statistics are for the Greater Sacramento area including Sacramento, Yolo, Placer and Eldorado Counties
It has long been the Federal Reserve's Policy to fight inflation by raising interest rates to slow consumers from spending too fast and causing inflation. So you might ask why with housing prices rising to an almost unaffordable high that the Fed (the Federal Reserve) has not raised interest rates to combat such high housing prices. Well, the answer might surprise you or it might just be so obvious that you slap your economic head and say wow that's right. Inflation is a rise in prices of consumer goods and services over time given in a percentage of gain from month to month or year to year. The rise in housing prices can and is quantified the same way, however, the big difference between goods and services and Housing prices is that consumers need the basics every month like food, consumer goods, and services from plumbers, electricians, etc., but consumers don't buy houses every month. On average people stay in their housing for an average 5-7 years thus not being affected by housing prices until it is time to move. In addition, when housing prices go up and people stay in their homes for an average of 5-7 years they end up realizing price gains on their existing home and this is called realized equity. So when the prices of goods and services increase month to month consumers need the basic items to live so they will buy them realizing no equity as these items are consumed.
Household income plays a factor in inflation as well as the more money people make the more they tend to consume. So if America on the average is making more money they will consume more creating a higher demand for goods and services thus prices will rise to offset the higher demand. So why doesn't such high priced housing effect interest rates? Simply put housing is not something consumed it is an asset that has trade value or equity. In addition, people are not in need of purchasing housing every month or every year for that matter.
It has long been the Federal Reserve's policy to keep inflation around 2% and since the 1970's the Fed has done a great job of keeping in check. However, I believe there are other factors in play the Fed is not taking into consideration. I will say that the high priced housing has used up far more of the average household budget thus leaving consumers less money to buy goods and services with. This may either be by design, but I would contend that it is actually a happy accident in the Fed's favor. If you are spending the majority of your income on your housing expenses that leaves you with less money to buy goods and services. In addition to that technology is such a big part of today's world that people don't need or want for more personal items to keep them entertained or fulfilled thus lower demand for certain physical items. It is tough to have inflation if the demand for things goes away and that is what technology has done. An example are college kids these days. College kids need to eat, drink and study, but with their smartphones, they can get everything they need on that device delivered to their door and their entertainment is at their fingertips. Technology has slowed the need or the demand for goods and services and by doing so has slowed inflation. I hope this has enlightened you on how the markets work and how they change. I will predict that we see some changes in the Federal Reserve's approach to fighting inflation by raising interest rates in the future with the onset of even newer technology advances.
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