The Federal Reserve’s rate hikes have helped push down overall prices, but are also keeping inflation high because of the way the cost of homeownership plays into key metrics, according to housing expert Jim Parrott and Mark Zandi, chief economist at Moody’s Analytics.
In a WashingtonPost In an op-ed Thursday, they urged the Fed to “declare victory” over inflation and start cutting rates. Central bank policymakers will meet next week and markets expect them to keep interest rates steady at a 23-year high.
Although consumer inflation has fallen sharply from its peak two years ago, it remains stuck above the Fed’s 2% target, prompting Chairman Jerome Powell to keep rates high for longer.
But that position is based on a “serious misjudgment,” according to Parrott, co-owner of housing consulting firm Parrott Ryan Advisors and a former White House economic adviser during the Obama administration, and Zandi.
It stems from the way the personal consumption expenditure deflator, the Fed’s favorite inflation gauge, and the consumer price index attempt to measure the cost of homeownership by estimating the rent of a comparable home in the neighborhood.
The approach is flawed, they wrote, because most homeowners don’t have a mortgage or have a fixed-rate mortgage, meaning their actual costs haven’t changed much. But because inflation rates estimate a notional rent based on the rising real prices renters pay, homeowners’ implicit costs have risen.
Additionally, Parrott and Zandi said it is “virtually impossible” to estimate implied rent in communities where most homes are owner-occupied or in situations where most rental inventory serves multifamily residents, while owner-occupied inventory serves single-family homes .
If the Fed were to ditch that methodology quirk, inflation would arrive at the 2% target, they said.
Meanwhile, the Fed’s aggressive rate hike has exacerbated tight supply in the housing market by making it harder to build new homes and discouraging homeowners from giving up their low mortgage rates, she added.
“This disruption in the housing supply pipeline increases the costs of buying and renting, raising the very inflation measure the Fed relies on,” Parrott and Zandi wrote. “The tool the Fed is using to reduce inflation does the exact opposite.”
Recent data show that rents have risen again after cooling down earlier this year. To comfortably pay rent, you’ll need to make nearly $80,000 a year, according to Zillow, compared to less than $60,000 five years ago.
And while there are signs of weakness in home prices in certain markets, national figures show prices are still rising.
Parrott and Zandi aren’t the only commentators who see the Fed in a box. Apollo chief economist Torsten Sløk said last month that central bankers are in a self-destructive spiral.
“You can call this the Fed Cut Reflexivity Paradox: the more the Fed insists that the next step in interest rates is a cut, the more financial conditions will ease, making it harder for the Fed to cut,” he wrote .
This story originally appeared on Fortune.com
