VIPs
- Shelter costs, which comprise 42.1% of the CPI, rose just 2.3% YoY in yesterday’s July release; single-family rental, a perfect proxy for OER, however, are enjoying new leases jumping as much as 14% YoY, signaling the disconnect between Fed modeling and reality
- Home price inflation leads changes in the CPI shelter cost by about 5 quarters, per Fannie Mae, who predicts a 6% YoY rise in shelter by the end of next year; with the CPI’s 3-month average housing appreciation already at 1.22%, the transitory narrative is on shaky ground
- Most sell side economists are optimistic about a steady expansion once herd immunity is achieved; however, with the fiscal cliff, budget reconciliation, and Midterms looming, Fitch has the US sovereign on Negative Outlook due to the risk of a “deterioration in governance”
Carroll Wright was destined to be a tireless bureaucrat, a unique breed if ever. The son of a Universalist minister and farmer, he rose to the rank of colonel in the 14th New Hampshire Volunteers during the Civil War, became a patent attorney and served two terms in the Massachusetts Senate. Life’s successes did not, however, quench his thirst for bureaucracy. Matter ye not that Wright didn’t know squat about statistics. The corrupt first iterations of his state’s Bureau of Labor Statistics, rife with activists in the labor movement, came close to wrecking the aim of producing usable data before the effort got off the ground. Appreciating his independent streak, in 1873, Governor William Washburn appointed Wright to set the burgeoning bureau straight, which he did so well, 12 states soon followed. Within 11 years, his acclaim had swayed Congress to go national, establishing the Bureau of Labor within the Department of the Interior…with Wright as its first chief despite his retaining his home state gig, which lasted three years.
With his moonlighting days behind him, Wright moved into the study of prices, wages and hours of work. The economic effects of the tariffs sponsored in 1890 by Representative William McKinley of Ohio, who seven years later went on to become President, provided the data needed to establish critical baselines. The results were 1892’s “Retail Prices and Wages” followed by “Wholesale Prices, Wages, and Transportation” the following year. True groundbreaking did not arrive until 1902, when using a survey based on the years 1890-1901 and a novel statistical concept, the Bureau published the Wholesale Price Index. This was followed in 1903 by the first weighted retail price index, which covered only the category of food.
These days, the Core Consumer Price Index (CPI) that has the capacity to spook markets dispenses with not only food, but energy as well, for bad measure. Criticism that these gauges underrepresent life’s most burdensome costs was, once again, fully warranted in Wednesday morning’s release of July’s inflation data.
It all comes down to academics who’ve run wild with models that don’t capture the true cost of living. The biggest input to the CPI – shelter, with its 42.1% weight (left pie) — is calculated using “imputed” rents, how much you would theoretically have to pay per month to rent the house you own. The relative lack of hard data was once a hindrance; too few homes were rented out on a consistent enough basis to construct a body of data.
But there’s now an abundance of data, and has been for the last decade, highlighting statistical agencies’ inability to evolve. The cost to rent your own home is more visible than any time in U.S. history. The explosion of publicly traded single-family rental (SFR) companies leaves little to the conceptual. In its recent second quarter earnings report, Invitation Homes, the nation’s largest SFR player, reported new leases are fetching 14% year-over-year (YoY) growth. That compares to the 2.3% reported for YoY shelter costs in yesterday’s July CPI report (blue line).
Fannie Mae anticipates this yawning gap will slowly close, manifesting in a stickier source of uncomfortably high inflation for Federal Reserve officials. Per the GSE, “On a year-over-year basis, house price gains historically lead changes in the CPI shelter cost measures by about 5 quarters.” Their forecast in the table suggests that by the end of next year, shelter as a standalone will be running at close to a 6% YoY rate, contributing 2.3 percentage points to Core CPI.
Soon-to-be fishing buddy Jim Bianco (I’m flying to Maine to reunite with my Camp Kotok friends) points out that the acceleration in shelter is already apparent with the three-month moving average rising to 1.22%, the fastest pace since May 2004. Double that rate in coming quarters and the “transitory” narrative will fall to pieces.
That said, the Fed will buy as much time as it can, hiding behind the core PCE, which discounts by nearly 20 percentage points shelter’s weighting vis-à-vis the CPI (right pie). Using this even more flawed metric suggests shelter’s contribution will peak at 1.0% by yearend 2022.
The unknown is how viable the Fed’s credibility will be if the economy slows even as housing costs accelerate. Most sell side economists expect the almost uninterrupted economic expansion, which began in 2009, to be sustained once herd immunity is achieved. The current disruption, which is already slowing economic activity anew, will pass quickly as will bipartisan infrastructure legislation, the $3.5 trillion social spending bill, the debt ceiling, the budget resolution and the Midterms with zero economic effect. Color the rating agency Fitch a skeptic given it has the U.S.’s sovereign rating on Negative Outlook due to the risk posed by the “deterioration in governance.”
As for Wright, in 1893, he was appointed Superintendent of the Census, a role he held for his first four years in office concurrently while also head of Labor. (A bureaucrat who held down two jobs…twice?!) His independent rigor should be reapplied when the data stray too far from the reality lived on the streets of America. In Wright’s words, statistical agencies’ work should be devoted to “the fearless publication of the facts without regard to the influence those facts may have upon any party’s position or any partisan’s views.” Maybe we even extend this philosophy to the biased number crunchers at the Fed.