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Wednesday, May 11, 2022

US Housing Component Of CPI Not Letting Up


Unless I was interested in short-term breakevens, I viewed the consumer price index (CPI) as a lagging indicator and therefore not too exciting. As such, I am not as enthusiastic as other commentators with regards to reading the entrails of the CPI report. My interest was more in the underlying trends, and what we would expect to change. The problem with the U.S. CPI is that one of the most important “underlying” factors is housing — and the housing component has taken off like a rocket.

There’s a lot of conspiracy mongering with regards to the housing component of the CPI which muddies popular discussion of the topic. The short version of the story is that it is largely based on rent measurement, and not house prices. So long as one is not an inflation nutter, this makes perfect sense.

The figure above shows the annual rate of change of the (seasonally adjusted) housing component, as well as the annualised rate of change over the past six months. Even if the six-month rate of change has peaked, it is still at a crazy high level when compared to past history.

It is safe to say that such a pace of rent increases is unsustainable, but at the same time, it is not clear whether anything other than a recession can cause a turn around to more reasonable levels that are consistent with overall inflation being closer to 2-3%.

Although there has been some softening in economies and sectors, another wave of “external factors” are likely to hit globally-traded prices. The collapse of shipments out of China will soon snarl supply chains, a shortage in diesel is going to cause problems, and weather does not seem to be cooperating with wheat production in a fair number of growing areas. As such, the annual CPI rate is likely to retract as extremely strong levels from a year ago roll out, but we are set to take another run at the peak.

(I was planning to make a short comment on breakeven inflation, but I will wait for the dust to settle.)

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(c) Brian Romanchuk 2022

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