The Biggest Component Of CPI - Rent - Is Now The Highest Since 2008: What Does This Mean For Broad Inflation?

Tyler Durden's picture

Even as the Fed laments that inflation as measured by either the hedonically adjusted CPI, or the PCE deflator measure (which on any given month is whatever a seasonal adjustment excel model says it is), is persistently below its long-term target of 2%, one component of the broader CPI basket has quietly continued risen to new multi-year highs. That would be the so-called owners’ equivalent rent (OER), which is the biggest component of the CPI, and measures imputed costs of renting one’s own home: it is currently the highest it has been since 2008.

 However, while it accounts for a whopping 23.9% of the CPI basket, OER has a far smaller share or 11.3% of the Fed’s preferred inflation metric, the PCE deflator.

Bank of America observes that over long periods of time OER and the rest of the CPI should tend to move together, reflecting overall inflation — that is, changes in the purchasing power of a dollar. However, in recent years that has been anything but the case, with OER now the highest since the Lehman crisis and rising ever higher even as the Non Shelter Core CPI continues to decline.

To be sure, the surge in rent prices to record highs is nothing new, and should be familiar to Zero Hedge readers. After all we presented just this a few short months ago:



Still, this divergence between rising rental inflation and disinflation in everything else has led Bank of America to ask whether as some analysts expect, an abrupt reversal in inflation is due with surprises to the upside. BofA cites said analysts who point to “special factors” that have either temporarily depressed inflation or are poised to jump higher very soon. Some of these stories have difficulty explaining why inflation has been so low for the past few years — those are rather persistent “temporary” factors.

At this point BofA points out that while in the short-term the divergence between the series is indeed notable, over the longer-term the two datasets eventually converge:

That co-movement can be seen clearly in Chart 1: since the user cost concept of OER was incorporated into the CPI in 1983, the correlation between the annual inflation rates in OER and the non-shelter core CPI has been 0.63. This strong positive relationship largely reflects the general downward trend in inflation since the  early 1980s, as the Fed consolidated the credibility gains from the Volcker disinflation and as other macro factors (such as globalization and the decline of collective bargaining and wage indexation) helped restrain price growth.


Look a little more closely at Chart 1, however, and it becomes apparent that there are several periods in which OER goes up — at least for a short time — but then reverts back to trend. Thus, it can be a misleading indicator of inflationary pressure in the medium term. More importantly, these times are typically ones in which the rest of the core CPI index falls as OER rises. This pattern is particularly clear in Chart 2. Since the peak of the housing bubble, the correlation between OER and non-shelter core CPI inflation actually has been negative: -0.29, in fact.

What is Bank of America's conclusion about this

We can make this intuition more rigorous by separating the two inflation series into a longer-run trend and a cyclical component. The low-frequency trend in inflation likely varies over time, as inflation expectations and more persistent economic factors (such as globalization, as noted above) are not constants. We estimate these trends using an unobserved components model over the full sample of available data. Not surprisingly, the time-varying trends are highly correlated: 0.79. This correlation coefficient is larger than for the two individual series as the model isolates the common long-run determinants of inflation.


Conversely, the cyclical components as identified by this procedure are negatively correlated, albeit not significantly so for the full sample: about -0.03. Looking just at the post-bubble period, the correlation drops to -0.33. Thus, if anything, high OER has been an indicator of lower, not higher, inflation. What is going on? In a nutshell: tight household budget constraints.

And there you have New Normal Paradox 101.

In its attempt to reflate asset prices at all costs, and succeeding with both the stock market and new housing bubble if not so much wages and the broad economy, the Fed has made housing unaffordable for the vast majority of the population (confirmed further by the plunge to 15 year lows in mortgage applications), forcing Americans to scramble for rental housing, sending rents to all time highs. This can be is seen in the OER. The problem is that with so much of monthly discretionary spending going to rental, it means there is far less in free cash flow available to be used for other purchases. Which also means that inflation away from rents is declining and getting lower with every month almost as a result of the surge in rents!

Continuing with Paradox 101: if indeed the Fed wants to stimulate broad inflation and boost the economy with a stable and achievable 2% inflationary target, it should pop the housing and rental bubbles, and send prices for this component of the CPI basket plunging, affording consumers more discretionary cash flow for other purchases.

Sadly, the Fed, comprised of clueless economist PhD hacks, will never figure this out, and instead will ponder and wonder how it is possible that month after month even more broad deflation appears to be setting in. Of course, it only needs to look at the culprit - every period the incremental inflation is being eaten up by the monthly rental paycheck. Sadly, it won't, and certainly not before it is too late, and this too housing bubble bursts uncontrollably. By then, then there will be bigger fish to fry, than wondering where all the inflation has gone.

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eduard khil's picture

The rent is too damn high. 

krispkritter's picture

Don't worry, they'll just modify CPI and remove it. Voila! Fixed!

Pladizow's picture

Yes, perhaps rent can be substituted with a tent or cardboard box?

N2OJoe's picture

There's never been a better time to buy a home!

-Your friendly local realtoshyster

gtb's picture

There's never been a better time to buy OR SELL a home!


Fixed it.

pragmatic hobo's picture

or they will have rent equivalent ... cost of sleeping bag.

W74's picture

Yes.  It absolutely is.

The solution to this is actually less government interference which pushes up rents in a variety of ways (section 8 going straight to landlords, holding back foreclosures, rent control, excessive zoning control, etc.)

depression's picture

If you like  your high rent , you can keep your high rent !

Seahorse's picture

The rent-seeking is also too damn high.

-.-'s picture

This and this are great reminders of prior submitted articles that corroborate information regarding reasons as to why the public would see CPI consolidated around rent costs.


If the financial vehicles being pushed about and brokered are newly created (Frankenstein) securities with their investment value tied to lease tranches, then wouldn't it seem that a rise in the percentage of the CPI that goes to rent would also increase? The case that more consumers would be entering the market for rental properties in the upcoming years for whatever various personal financial reasons (lost job, relocated, divorced, etc.) could have been the speculation of a few larrge private equity groups or REITs; thus, the expensive creation of yet another complex investment vehicle in hopes of cathcing the profits of a greater number of renters. But, I wonder, how sly of an underhand might large firms have when it comes to ensuring the larger number of renters (i.e., influencing policy to be carried by the politician whom the public did vote in to office)? 


Does the creation of such synthetic structered securities provide negative incentives to those persons (or organizations) associated with the success of the rental market (and therefore this particular asset class)?

Stoploss's picture

Where's the 2 percent inflation Jan???????????????????????

buzzsaw99's picture

Asking rent for vacation properties is a sick joke. I can stay at the Hilton cheaper.

A Nanny Moose's picture

...which still costs double what it was in 2001

buzzsaw99's picture

hotels have maid and room service. rates change quickly according to market conditions. delusional would-be condo renters are out of their minds.

buzzsaw99's picture

in 2007 the best room at the sheridan on maui cost $2000 per night. In 2009 we paid $200 per night. I'm sure it is back over $500 now.

Hughing's picture

It means a lot, but, nothing official

akak's picture
The Biggest Component Of CPI - Rent - Is Now The Highest Since 2008: What Does This Mean For Broad Inflation?

Personally, I like it when broads inflate --- especially their busts and backsides.

SoilMyselfRotten's picture

You can't forget to let the air out of her when you're done

kirov's picture

Inconceivable! Repeat after me, "There is no inflation, There is no inflation!"

If that doesn't work we'll just have remove it from CPI like we did everything else.

There, now don't you fell better?

t0mmyBerg's picture

I'll tell you where there is also inflation and that is food.  Of course that is non-core because it is volatile because it goes up and down right?  Or mayb emostly up it seems.  I just went to Jimmy Johns to grab a sandwich since I was already out and it usually is just a littl over $5 just for the sandwich.  Not today.  $6.43 for just a fucking sandwich.  I asked "Prices go up?"  Reply "Yep".  Fu-uck.  $6.43 just for the sandwich.  How much with chips and a drink I wonder?

Shizzmoney's picture

Remember, as long as you can deny inflation, then there *is* no inflation. #fedmandates

Also, a social dynamic has changed whenre people are trying to distance themselves from debt as much as possible.  One less payment, one less due date, more cash in your pocket (which with today's stagnant incomes, few and far between).

I'd rather rent than sign *any* piece of paper (in terms of a mortgage) that is backed by TBTF criminals like JP Morgan or Citi.

At least as long as the Fed prints moar, that will just mean more cheap debt for Blackstone and other PE vultures to buy houses up.

LawsofPhysics's picture

Why not pay cash?  Who says you have to sign anything?  Fuck the banks, dump their paper promises and get real assets (of all kinds).

N2OJoe's picture

Bc cheap credit drives up prices beyond most people cash abilities

Agstacker's picture

It takes awhile to save up enough cash to pay for a house.

akak's picture

So?  If we eliminated debt from our perverse economy, EVERYONE would be far wealthier and better off.  Parents could afford to give their children a substantial portion of their home payment (in cash, remember) from the significant SAVINGS that they would routinely manage to accumulate by NOT having ever gone into debt themselves.  And their children would then IMMEDIATELY be able to begin to save for their own retirement, and their own children's home payments, at the very start of their own working lives.

But everyone is ADD-afflicted in this modern day and age, and wants everything NOW, with no real thought ever given to the radically negative impact of having AND then eating one's cake before ever having to pay for it.

elwind45's picture

You just collapsed the money supply and you get to send your kids to fight the creditors and get money from military to attend online in the war zone

akak's picture

A REAL and honest monetary system does not require, nor is influenced by, debt or the lack of debt.

Free Wary's picture

Exactly. Taking on debt is extremely risky in this economy. How will you pay it back if you get laid off? How will your business pay it back if your customers get laid off?

kirov's picture

Did you learn nothing from the previous crisis? Who cares, someone will bail you out.

The amount of stock purchased on margin are at record levels

N2OJoe's picture

Maybe, but I'm not TBTF&J so probably not

Free Wary's picture

I didn't get bailed out in the last crisis! Next crisis has potential to be so bad TPTB won't be able to bail out their loyal voters and contributors.

darteaus's picture

If they stop denying inflation, the interest rates will start to rise, and that will bring the whole house of cards down.

Free Wary's picture

I pay $2000 a month for 1000 sq ft. I could have gotten $1500 if willing to accept a less nice location or building. Median household income in my zip code is 55k. Condos in my zip code start at 500k, homes start at 1million.

Rent to purchase ratio very unfavorable so I'll gladly rent till the market pops. Nobody I associate with here agrees with my appraisal that homes here are at least 100% overvalued.


I live in central LA

W74's picture

So 24k/year.  And is that 55k before or after taxes get taken out of your check?  I wouldn't exactly call spending 45% (before taxes) or 60%+ (after) of one's income on rent a healthy thing.

I'm not advocating housing either; the average person is screwed either way, but in my opinion, at least in my market, renting twists the screw an extra couple rotations.

BeetleBailey's picture

Jesus fuck dude.....move...


Free Wary's picture

You got a job for me? I have IT and statistics skills this is where I found work. Fortunately I earn much more than average.

BeetleBailey's picture

Learn to trade the FX market/3 ring circus dude....your qualifications fit...


Just be dispassionate.....don't give a shit one way or the other....learn charts....and work from where ever you want....


and FUCKIN move! Jesus..........

darteaus's picture

Real estate moves in 5-7 year cycles; 2007/8 was the latest low and 2013 was, I believe, the latest high for CA.

Seasmoke's picture

Chain index. You can live in a box. So no inflation.

depression's picture

No need to live in a box, you can simply split the rent up by adding more sub-lease renters per rental unit.

LawsofPhysics's picture

Well, the answer to your question depends on your prospective.  Are you a property OWNER or not?

Rents can usually be paid if people have decent wages.


If they don't, well then, tick tock motherfucker...

depression's picture

Tylers needs to plot the number of occupants per rental unit .vs. rent price per unit.

The higher the rent goes, the more underemployed and marginally employed sub-lease renters per dwelling unit will be required to meet the monthly rent payment.

BeetleBailey's picture

FUCK any government "measure" of anything.

2% "inflation" is a sick fucking joke...and the CPI number is fudged more than a nougat in a Fanny Farmer assembly line....

Why Yellen isn't called out on this asinine "figure" is testimony that they are ALL in on the this shit-casino fucked up "market"

darteaus's picture

Must...control the the rage...ARRRRGGHHHHHH!!!!

Robot Traders Mom's picture

I'm waiting for the day (any time now), where the government recalculates CPI to the rate on savings accounts...

khakuda's picture

Exactly why the Fed changed their preferred inflation metric a year or two back.  They wanted to get the rent component down.




LawsofPhysics's picture

Correct, when you own congress, you can change the rule and move goal posts however you like.

Caveman93's picture

Rent NOW or forever be priced out of the market!

Oh, wait..that don't work does it?

darteaus's picture

It does where there is rent control: NYC & SFO.

andrewp111's picture

Obama is doing his part to raise general inflation. What else do you think a higher minimum wage is for (beyond elections)?