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Inflation improves slightly in April, but high cost of housing remains a big obstacle

Don Lee, Los Angeles Times on

Published in Business News

Government data released Wednesday show that inflation eased a bit in April, but remains at a relatively high level. The latest report isn't likely to lift the grim mood that much of the public has toward an otherwise solid economy.

Though incomes have generally risen more than consumer prices, the overall rate of inflation remains stubbornly high. It dropped a notch in April but was up 3.4% from a year ago, the Bureau of Labor Statistics said.

And unexpectedly, the biggest culprit is housing.

The Federal Reserve's textbook-perfect policy of fighting inflation by pushing up interest rates has worked in large parts of the economy. The higher interest rates have helped slow growth in consumer prices for items such as food, gas, clothes and cars. Today, the inflation rate for those products is back down to, or even below, the central bank's 2% target.

But the Fed's same policy has paralyzed housing, an important segment of the economy, and sabotaged efforts to bring down overall inflation faster.

What the higher interest rates have done is freeze both homeowners and renters in place, discouraging either group from moving. The effect has been strong in California, where housing — what economists call the cost of "shelter" — was already very expensive.

 

And, in a complicated chain of cause and effect, the fact that both homeowners and renters are staying put has worked to keep inflation high.

"For two years we've been waiting for shelter inflation to drop enough to have an effect on the overall inflation rate. It's constantly disappointing," said G.U. Krueger, a longtime housing economist in Los Angeles.

"Because of high interest rates," he said, "there's no mobility out of rental situations to buy homes. Everyone is stuck — homeowners with golden handcuffs, renters basically with unadorned handcuffs."

For homeowners, inflation is helping make their homes more valuable. But selling isn't an option for many because they don't want to give up their lower mortgage rates. Today the average 30-year fixed rate is more than 7%. Higher home prices also mean they could lose whatever gains they'd made when they replaced the house they'd sold.

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