Stuck In A Wholly New Inflation Zip Code

When we look at our trusty 16% trimmed mean CPI readings, we get 12-month, 3-month and 1-month annualized rates of 6.6%, 5.4% and 7.0%, respectively. That’s modest volatility, but nothing at all like inflation dropping through the floorboards per the smart aleck Wall Street theory that was all the rage a few weeks ago.

Indeed, we are now stuck in a wholly new inflation zip code well north of 6.0%, where the Y/Y reading has now posted for 11 consecutive months. That’s three times the 2.0% zone that prevailed between 2012 and 2019.

So the anti-inflation battle is not nearly won; it’s just getting started. And that means, in turn, that the vaunted Fed Pivot is not not just around the corner; it’s actually nowhere in sight.

Y/Y Change In 16% Trimmed Mean CPI, 2012-2023

The foolish theory that inflation would soon be posting run rates close to zero was based on a complete misreading of the blue bars for late 2022 in the “asking rents” chart from the Apartment List shown below. The month-over-month readings were negative for the last 4 months of 2022, which caused know-it-alls like Peter Tchir to start ragging on the BLS for posting rental data that was allegedly 12 months behind the eight ball.

Well, not exactly. The Apartment List figures are for new contract rents signed during the month at issue, which may represent about 1/12 of the total rent roll, given a tendency toward one-year contracts. By contrast, the CPI is designed to capture monthly change in the total rent roll, not just for newly rented units.

That distinction is far-reaching in terms of its impact on the CPI because the BLS also uses rents as a proxy for home-ownership costs for the 85 million households which own their own homes. So the math is dispositive. Every month approximately 3.4 million new rental contracts are signed, but behind those stand 37.6 million additional renter households, which will reprice in the next 11 months; and then another 85 million homeowners who pay “imputed rents” (OER or Owner’s Equivalent Rents) in the BLS scheme of things.

Taken together, rents of primary residence and OER account for 24% of the weight in the CPI and more than 40% of the weight in the so-called core CPI (excluding food and energy). Accordingly, if rents were really going down hard, the CPI would indeed plunge with a thud.