GIVEN a mandate for price stability, as well as low unemployment, one would think that bubbly inflation statistics would make the Federal Reserve nervous. For the most part, I'm sure they have. But Calculated Risk

suggests

In nominal terms, the [Case-Shiller] index is off 8.9% over the last year, and 10.2% from the peak.



However, in real terms, the index has declined 12.9% during the last year, and is off 14.6% from the peak.



Inflation is helping significantly in lowering real house prices. If prices will eventually fall 30% in nominal terms, then we are only about 1/3 of the way there. But if the eventual decline is 30% in real terms, then we are about half way there.

that Ben Bernanke might not be as upset by inflation as he normally would be. You see, this downturn is housing led, and:

Seems like a painless route to price adjustment (except for the lenders who're being repaid in dollars worth much less than the ones they originally lent out). Can market clearing really be as easy as all that?

Perhaps not. As Free Exchange noted yesterday, inflation is also having a rather nasty effect on real incomes, because nominal incomes aren't moving much while prices are increasing. What's more, while inflation may help upside-down homeowners get out from under their debt, the real value of their homes is still declining.

Money is only as good as the goods you can buy with it. Say you bought a home for $1 million only to watch its value fall to $750,000. If inflation pushes the price of that home back up to $1 million, then that will get you ahead of any fixed interest rate debt you took on to buy the house. If you sell your home for $1 million, however, the basket of goods you can buy with your million will be much smaller than the basket you could have purchased with the million from a few years back. Inflation or no, the value of a home relative to other consumption goods is still falling.

And we shouldn't expect declining interest rates to help potential homebuyers all that much, either. As Calculated Risk also reported, the spread between fixed mortgage rates and adjustable mortgage rates is increasing, suggesting that lenders are taking higher inflation expectations into account. As such, borrowing at fixed rates is expensive now. Borrowing at adjustable rates is cheap now, but it will become expensive later as the economy recovers and the Fed begins to attack inflation.

So yes, inflation can have some helpful side-effects for homeowners. Given the extent to which rising prices are squeezing consumers and contributing to reduced spending, Ben Bernanke probably feels that, on balance, less inflation is better than more.