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The Over/Under Of The CPI Number

The BLS reports CPI inflation tomorrow with the expectations of the print in the above table. We are taking the under on the overall consensus expectation…

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This article was originally published by Global Macro Monitor

The BLS reports CPI inflation tomorrow with the expectations of the print in the above table.

We are taking the under on the overall consensus expectation of 1.1 percent and the over on the core of  0.5 percent.   All based on anecdotal evidence as we see gas and avocado prices plummeting over the past few weeks and rents skyrocketing.

Housing 

Nevertheless, the BLS has really painted itself in a corner with how they measure housing inflation.

We have been beating this dead horse for years, and now it has risen from the dead and will bite the BLS and the inflation figures in the arse. For the first time since its inception, the new measure of housing (OER – Owners Equivalent Rent) will be tested in a high inflation environment.

How odd is it that housing prices are softening, but a fixed-rate mortgage is up almost 100 percent in the last twelve months?  Moreover, what if homeowners get the Airbnb bug and believe they can rent their homes at the Airbnb rate?   That’s trouble with a capital T for the inflation figures, folks, as OER is 25 percent of the CPI basket.

The Los Angeles Times printed a good piece yesterday, which sounded like the Global Macro Monitor.

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Money Quotes:

  • Annual rental costs for new tenants jumped from 4.3% in July 2021 to 11.1% in March 2022. For existing tenants, inflation was lower and grew at a slower pace over that period, climbing from 1.5% to 2.7%. For residents of owner-occupied units, the trend was similar. (BLS is expected to release inflation data for June on Wednesday.)
  • With the spread between the new-renter and continuing-tenant rates at an all-time high, according to BLS data, that bias is even more pronounced than usual. That gives new ammunition to critics who have argued the data published by the BLS fail to reflect the severity of housing inflation, especially in states such as California, where the cost of housing is higher.
  • Beyond masking the extent of inflation faced by new tenants, Sohn said, the agency also distorts the market’s reality with the way it calculates the cost of housing ownership. Almost two-thirds of Americans live in homes they own.
  • Since 1983, BLS has approximated the rental value of owner-occupied homes by measuring the rent paid by tenants in the same vicinity. This is then translated into a rent equivalent.
  • “To me, the owner-occupied rent is somewhat a wild guess in the official data,” Sohn said. “If I were to rent my own house to myself right now when the price rise is really high, I would be paying much more than what an apartment rent would charge but the BLS wouldn’t reflect that necessarily.
  • ”This data is evidence that rents are going up very fast, faster than they have been, for new tenants after a long period of slower price growth,” said David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
  • Past trends suggest it’s only a matter of time before the higher inflation rate spills over into renewals as well, he said.  – LA Times

The Heavy Weight Of Housing In The CPI

Housing is 42 percent of the CPI basket and overshadows all else. Nothing comes close in terms of its importance.   See our early May post, CPI Inflation’s Big Problem: Housing.

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This will be a big headache breaking the feedback for the policymakers. We wouldn’t be surprised if they start tinkering with the basket again.

The Fed made their inflationary bed, and now they have to sleep in it.  And we all suffer…well most of us.


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