Inflation climbs yet again … the Fed’s war on lower-income Americans … what will happen in the housing market? … was last week’s jobs report “fake news”?

That crackling noise you’re hearing is the sound of your savings going up in flames.

Today’s Consumer Price Inflation (CPI) reading was scorching, coming in above even the loftiest predictions.

The data from the Bureau of Labor Statistics show June’s CPI climbing 9.1% year-over-year, crushing the estimate of 8.8%, and miles ahead of May’s reading of 8.6%.

Even “core CPI,” which excludes energy and food, topped expectations. It came in at 5.9% compared with the 5.7% estimate.

On a monthly basis, headline CPI rose 1.3%, compared to 1.1% forecasts. This is the largest monthly increase since 2005.

So, where do we go from here?

Well, what this means is the Fed will continue its covert (or not so covert) effort to just barely kneecap the economy.

To be fair, they don’t want a full-on “Misery”-style hobbling, where Kathy Bates takes a sledgehammer to James Caan’s ankles.

They want more of a kinder, gentler, Nancy Kerrigan/Tonya Harding-style attack. You know, out of commission, but only temporarily. No permanent damage.

Despite what you might have heard from various politicians, the Fed can’t have its cake and eat it, too. It can have either low inflation or a robust economy, but not both. (At least, not in the near future.) And all signs point to one thing…

The economy better watch its back.

But when we dig deeper, it suggests something else – it’s actually lower-income Americans who better watch their back.

***What got us in this mess, and how the Fed wants to get us out

Remember how this works…

Inflation happens when too many dollars are chasing after the same volume of goods. In other words, demand outpaces supply.

As we’ve detailed in past Digests, consumer demand comes in hot when: 1) consumers have more cash in their pockets to spend, and 2) they feel wealthier.

We’ve had both of those dynamics over the last couple years. As to cash, the U.S. consumer has been flush thanks to stimulus money and extra savings from the lockdowns.

As to “feeling wealthier,” the U.S. consumer has enjoyed watching his/her home value and portfolio value soar (until this year, obviously).

Now, inflation is taking excellent care of the “extra cash” part of this imbalance:

In recent Digests, we’ve cited data suggesting that pandemic-era extra savings is currently being tapped due to higher prices. This cushion is likely to run out within a handful of months.

That leaves “feeling wealthier” – which the Fed has been eyeing from the shadows, as it wears a ski mask and brandishes a tire iron.

The reality is that the Fed needs consumers to feel worse off so they stop opening up their wallets.

Economic anxiety results in less spending, which results in less demand, which eases inflation, and voila, the Fed has saved us all!

So, what’s the best way to make the average American feel poorer?

Attack the largest contributor to their net worth – their home value.

***Why the Fed might lose its war on housing, and who really will lose

Leading up to the 2008 housing crash, the biggest two-year price spike in home prices was 29%.

This time around, over the past two years, home prices have exploded 37% (and are now up 45% since March 2020).

Enter the Fed and rate hikes.

In the wake of the Fed’s monetary tightening, the average 30-year fixed mortgage rate has hit 6%, up from 3.2% at the start of the year. (It’s pulled back to the mid/upper-5% area in recent weeks.)

This is accomplishing the Fed’s desired outcome…sort of.

From the Washington Post:

After a stunning rise in home prices enriched sellers and keyed up buyers into frantic bidding wars, there are signs that the U.S. housing market is starting to cool amid a surge of new inventory and higher interest rates.

“For Sale” signs are multiplying in previously hot markets like San Jose, Chicago and Phoenix.

Okay, but wait – are we seeing meaningful, across-the-board price decreases? Or just decreased demand?

This is a critical distinction.

After all, if prices are dropping materially, then okay, the Fed’s attempt to make people feel poorer is working – while also potentially making homeownership more affordable for those who have simply been priced out.

But if what’s happening is just reduced demand, yet prices remain elevated? Then the outcome is just more and more people being shut out of home ownership by the combo of high prices and exorbitant mortgage rates.

Meanwhile, current homeowners are just riding things out in their richly valued houses, without feeling the Fed’s desired sting of a correction.

So, which is it?

***The fundamentals are still out of whack – don’t expect major price drops

Housing inventory in June was 19% higher than a year ago, but overall inventory remains about half of what it was before Covid.

Translation: Even though inventory is up, there are still not enough homes to meet the demand from would-be homeowners. And yes, demand is dropping, but there are still enough buyers out there to prevent a material correction in prices.

All we’ve really seen is the lower-income would-be homeowners throw in the towel.

Back to the Washington Post:

…Home values are still gaining, up 19 percent on average in the year ending in June, according to the data firm Black Knight.

“The market is cooling off, but that cooling has happened on the backs of buyers getting discouraged, on buyers being forced out of the market,” said Jeff Tucker, a senior economist at Zillow.

“People who thought they would join the party are being greeted by absolute carnage as far as affordability right now.”

Sure, certain markets that were especially frothy are seeing homes on the market longer, even some small price decreases. But nationally speaking, the fundamentals don’t support a major price correction. What’s more likely is a lengthy price plateau.

From Bankrate chief financial analyst Greg McBride:

While the recent pace of home price appreciation isn’t sustainable over the long run, that doesn’t mean prices are at risk of a sharp drop.

Real estate prices can move in big spurts — like now — and then show relatively little change over a period of years.

A plateauing of prices is the more likely outcome.

***So, what will this high-price plateau mean for many would-be homeowners?

Well, they’re relegated to the rental market. And what’s happening there?

Ah, now we can cue Kathy Bates and her hobbling sledgehammer…

From Yahoo! Money

:

The median monthly rent in May hit $1,849, a 26.6% increase since 2019, before the pandemic, according to Realtor.com’s Monthly Rental Report.

“Single-family rents continue to increase at record-level rates,” Molly Boesel, principal economist at CoreLogic, said in a statement regarding its Single-Family Rent Index (SFRI) report.

“In April, rent growth provided upward pressure on inflation, which rose at rates not seen in nearly 40 years. We expect single-family rent growth to continue to increase at a rapid pace throughout 2022.”

As we pointed in the Digest two weeks ago, we’re now seeing bidding wars for apartments, with offers coming in above the asking rental price.

For a little context, the average New York rent is above $5,000.

And to be clear, who is this hurting the most?

The lower-income Americans who aren’t able to afford a home, who are now seeing their monthly budgets stretched by exorbitant rental rates, too.

Is this really accomplishing the Fed’s goal?

But hold on, the hobbling isn’t complete…

***Last week, we got a very strong June jobs report.  But upon closer inspection, it highlights major trouble for lower-income Americans

One of the Fed’s favorite talking points boils down to: “The economy is strong! It can handle higher rates.”

Last week’s June jobs report seemed to support that takeaway. It showed a huge payroll beat of 372,000 jobs reported versus 268,000 expected.

But there’s a disconnect. The Bureau of Labor Statistics’ (BLS) very own June household survey found a decline of 315,000 jobs.

Huh? How is this inconsistency possible?

Well, there’s a simple explanation…

The number of people working two jobs is surging.

From UnseenOpp.com:

Full-time employees declined by 70,000 since March while part-time workers fell by 326,000. Multiple jobholders, on the other hand, have surged to a post-Covid high of 7.541 million.

Multiple jobholders swelled by 239,000 in June alone opposite full-time and part-time workers, who fell by 152,000 and 326,000 last month, respectively.

But it gets even worse.

Multiple jobholders whose primary and secondary jobs are both full-time just hit a record high as well.

In short, there are far fewer people working than the last handful of jobs reports would suggest.

There has, however, been a sharp increase in the number of people working multiple jobs. This is reflected in the recent jobs beats, which count the number of total payrolls, not workers.

This tells us two things:

One, it’s the lower-income Americans who are receiving most of the pain from the Fed’s monetary tightening.

Two, it calls into question the Fed’s talking point about the “strong” U.S. labor market. It’s potentially in far worse shape than anyone is willing to admit.

***Wrapping up, today’s CPI data suggest the Fed will keep the pedal to the metal for its next rate hike in a couple weeks

But as we’ve seen today, lower-income Americans are bearing the brunt of this far more than other groups.

Long-time Digest readers will find this theme very familiar – it has echoes of Eric Fry’s “Technochasm.”

For newer Digest readers, Eric is our macro specialist who put together a research video on the growing economic divide between the “haves” and “have nots” in America today.

This divide is complex, with many causes, but in recent years, it has been exacerbated by technology. I won’t dive into those details now, but you can watch the video for free by clicking here.

In the meantime, we’ll keep you updated on the housing and jobs situation here in the Digest.

Have a good evening,

Jeff Remsburg