November CPI: Thank you, gas prices! No thank you, owners’ equivalent rent
November CPI: Thank you, gas prices! No thank you, owners’ equivalent rent
– by New Deal democrat
Just like producer prices as reported last Friday, consumer prices for November confirm the inflection point of last June. Thank you, lower gas prices! Here’s what total and core (ex-food and energy) inflation look like, normed to 100 in June:
Since June, overall consumer inflation has increased 1.0%, so is increasing at a 2.2% annual rate. Core inflation has increased 1.9%, or a 4.7% annual rate.
To cut to the sectorial chase, here is the breakdown of all the important categories, first m/m and second YoY:
Total: +0.1%, +7.1%
Core +0.2%, +6.0%
Shelter +0.6%, +7.1%
Food +0.5%, +10.6%
Energy -1.6%, +13.1%
New vehicles -0-, +7.2%
Used vehicles -2.9%, -3.3%
As you can see, there remain only two sources of major inflation: shelter and food. In particular, take shelter out of total inflation, and consumer prices since June are *deflating* by -0.3% at an annual rate, and core prices since June are increasing at a 2.2% annual rate.
Further, as I’ve been pounding on for more than a year, “owners’ equivalent rent,” which is how house prices are measured for the CPI, lags badly, i.e., by a year or more. Here’s this morning’s update on what YoY house prices as measured by the FHFA (/2 for scale) look like compared with YoY owners’ equivalent rent:
As I anticipated, YoY OER has continued to increase, and is now up 7.1%. Meanwhile the FHFA house price index, through its latest reading for September, was up 11.0%.
The YoY increase in the FHFA price index has decreased by 33% in the past 4 months. At that rate actual house prices will be unchanged YoY by next April. Meanwhile I expect OER to continue to increase to 7.5% or so through winter.
I also want to comment briefly about new and used vehicle prices. Nominally they have both increased sharply since the start of the pandemic, up over 20% and 40% respectively. However, since average hourly wages are up 17% since then, in real terms new vehicle prices are only up about 3%, while used vehicle prices are still up about 25%, despite their decline this year:
In shot, the big decline in gas prices is having a huge impact on consumer prices overall. Food and used vehicle prices in particular remain problems. But inflation remains distorted to the upside due to the way CPI measures house prices.
As I’ve said for the past several months, at this point the Fed, via interest rate increases, is chasing a phantom menace, needlessly causing a recession, or at least a deeper one than would be otherwise necessary to achieve its objectives.
Is it really that difficult to directly calculate the cost of shelter for everyone? In the middle of the last century, maybe, but now? And then there are the close to a third who own their houses outright. I don’t pay a mortgage at any rate. Nor do I rent my home. The hypothetical cost of my having a place to live bears no resemblance to my actual costs, even over a multi-year span. That distortion would be bad enough if the CPI were just an academic exercise, but it is used in a way that affects the future of millions of people, for better or worse.
Sorry for the rant, but OER drives me crazy. You don’t build a house by replacing a third of the support beams with the blueprint for them. Not even a blueprint but an architectural sketch in some cases.
New Deal
please write a post explaining owner equivalent rent and how it affects “inflation” so the rest of us can understand what you are talking about.
Jane E
I think I agree with you, but I don’t understand what OER is measuring or why or how it affects anything but the shouting about inflation.
just as a guess” if the OER is supposed to measure the increase in cost of housing, even though it does not affect me at the moment, it might affect me when i come to sell my house or buy a new one.
and…i am resonably sure “rent” and therefore “housing” are being driven by corporate ownership of rental housing. they have the power to drive up rents because the renters have no choice but to pay…until they can’t. and then we have homelessness. not their problem.
not anybody’s problem apparently. the ony fix is to build genuine low cost real housing (not projects). owned by the government as reserve housing for dislocatons in the economy. gradually bought by the “renters” who can be encouraged to “acquire equity”, with generous forebearance of mortgage payments during employment crises, AND “emergency” housing for people who may never again be able to afford a home (or rent) because that is cheaper than the alternative homelessness. [and with clever management, the formerly homelss canbe persuaded to maintain and improve such housing..unlike the projects.