House Price Growth and Inflation During COVID-19

By Aditya Aladangady, Elliot Anenberg, and Daniel Garcia. They are all economists with the Federal Reserve. Excerpt:

"House prices have risen rapidly during the pandemic, creating $9 trillion in owner occupied housing wealth between the first quarter of 2020 and the first quarter of 2022. Both housing and non-housing inflation also moved up over this time period to its highest level in many decades. This note considers whether the large increase in housing wealth has been an important contributor to non-housing inflation during the pandemic.

There are two main channels through which increases in housing wealth can contribute to non-housing inflation. First, the increase in housing wealth can stimulate additional consumption among existing homeowners, either because they feel wealthier or by relaxing borrowing constraints (Guren et al., 2021; Mian, Rao and Sufi, 2013; Aladangady, 2017). This shift in aggregate demand can result in non-housing inflation, especially when the slope of the aggregate supply curve is steep, as may have been the case during the pandemic. Second, homeowners may become less price sensitive as they become wealthier, allowing some firms to respond to a less price-elastic demand curve by raising markups and prices (Stroebel and Vavra, 2019).

This note documents a strong positive association between non-housing inflation and house price growth across major metropolitan areas during the first two years of the pandemic. Also, we show this correlation is much stronger than in recent history. The association during the pandemic does not appear to be driven by other leading omitted variables that could be correlated with local house price growth and inflation, such as changes in the local unemployment rate or population growth. In addition, we find a strong cross-sectional correlation between house price growth and both nominal and real credit card spending.

Taken together, our results provide suggestive evidence that house price growth has been an important contributor to inflation during the pandemic, in part by shifting aggregate demand along a steeper-than-normal aggregate supply curve. A back-of-the-envelope calculation based on our regression estimates suggests that house price growth could explain about 1/3 of the increase in the consumer price index (CPI) excluding housing services between February 2020 and February 2022. At the lower bound of the 90 percent confidence interval around our regression estimate, house price growth still explains 13 percent of the increase in the CPI excluding housing services."