Eoin Treacy's view -
The foregoing factors present perceptional problems especially when met with sizable gains in employment that would normally result in rapid household income growth. It is tempting to see rent and OER increases as only the result of higher levels of demand. But despite recent glimmers of meaningful wage growth (mostly in lower wage, lower hours employment sectors) and the longer term reduction in U-3 unemployment to historically low levels, median U.S. household income in 2018, adjusted for inflation, remained less than 4% higher than it was at the turn of this century, 18 years ago (see Figure 13).
So there is something else going on here. As Figure 5 illustrates, the contribution of rent and OER to core CPI inflation hit a historic high of 81% in the summer of 2017. While such contribution moderated some in 2018, it remains the lion’s share of core inflation and is again increasing in proportion.
This begs another question, what would be the level of core inflation without price growth in rent and OER? There was evidence at the end of Q4 2018 that rents declined nationwide on an annual basis for the first time in more than six years, according to the Zillow Group real estate database9. Now this data, if the trend continues, will take some time to percolate through to the BLS and BEA data - even longer for it to migrate from rents to OER estimates – but if it persists it will clearly result in materially lower inflation data in 2019. Far lower than the FOMC was banking on to support its monetary policy actions of 2018.
I found this to be a very interesting and educative report not least for its breakdown of the composition of CPI figures. The Fed dot plot which will be released on Wednesday, along with its rate decision, is being eagerly anticipated by investors for some perspective of just how dovish the Committee has become.
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