CPIdata from the BLS, chart by Mish

Here's a headline that caught my eye this morning: "U.S. stocks are rising after cooler-than-expected inflation data."

Let's tune into the BLS Report for the details. 

CPI Month-Over-Month

• The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1 percent in May on a seasonally adjusted basis, after increasing 0.4 percent in April.
• The index for shelter was the largest contributor to the monthly all items increase, followed by an increase in the index for used cars and trucks. 
• The food index increased 0.2 percent in May after being unchanged in the previous 2 months. 
• The index for food at home rose 0.1 percent over the month while the index for food away from home rose 0.5 percent. 
• The energy index, in contrast, declined 3.6 percent in May as the major energy component indexes fell. 
• The index for all items less food and energy rose 0.4 percent in May, as it did in April and March. 
• Indexes which increased in May include shelter, used cars and trucks, motor vehicle insurance, apparel, and personal care. The index for household furnishings and operations and the index for airline fares were among those that decreased over the month. 

CPI Shelter

CPI shelter data from the BLS, chart by Mish

Shelter Notes

• Shelter comprises 34.56 percent of the CPI
• Rent of primary residence is standard rent (not owner occupied), unfurnished without utilities.
• Owners' Equivalent Rent (OER), is the estimated price one would pay to rent one's own house, unfurnished and without utilities. It is the single largest CPI component at 25.43 percent.
• The shelter index increased 8.0 percent over the last year, accounting for over 60 percent of the total increase in all items less food and energy.

Shelter Month-Over-Month

• For May, Shelter +0.6%, Rent of Primary Residence +0.5%, OER +0.5%
• OER up 0.4% or more for 21 straight months
• Rent of Primary Residence up 0.4% or more for 22 straight months
• Shelter up 0.4% or more in 20 of last 21 months

Energy prices bounce around. The price of gasoline rises and falls, but there is still no hint of falling rent prices as measured by the BLS.

All Items Except Food and Energy

• All items except food and energy has risen at least 0.4 percent for six straight months.
• All items except food and energy has risen at least 0.3 percent for 21 straight months.

CPI Year-Over-Year

Year-over-year CPI data from the BLS, chart by Mish

Year-Over-Year Details

• The all items index increased 4.0 percent for the 12 months Shelter ending May.this was the smallest 12-month increase since the period ending March 2021. 
• The all items less food and energy index rose 5.3 percent over the last 12 months.
• The energy index decreased 11.7 percent for the 12 months ending May
• The food index increased 6.7 percent over the last year. 
• The shelter index increased 8.0 percent over the last year. 

National Rent Prices

National rent price data from ApartmentList.Com, CPI data through April from the BLS, chart by Mish

Leading Indicators

Most analysts have been expecting the price of shelter to come down. 

I have not been in that camp and still are not, although we are getting closer to smaller increases.

National Rent Price vs CPI Month-Over-Month

National rent price data from ApartmentList.Com, CPI data from the BLS, chart by Mish

A decline in rent that most expected, never happened. I have been on the right side of this call since last October.

A few times recently I saw Tweets purporting that national rent prices were a leading indicator. I wonder, "A leading indicator of what?"

Prices are rising again.

Mish Shelter Flashbacks

• Oct 31, 2022: Rent Prices Have Declined Two Straight Months, But What Does It Mean? Rent prices are declining month-over-month but don't read too much about inflation into the decline.
• December 8, 2022: Ignore the Pundits, Don't Expect Big Declines in the Price of Rent. The price of rent appears to be falling rapidly. But some of that is seasonal, the rest is likely a mirage.
• January 5, 2023: National Rent Prices Decline Again, But Reports Are Very Misleading. Apartment List reports the fourth consecutive drop in apartment rent prices but that may not translate to your next lease.
• February 2, 2023: National Rent Prices for New Leases Drop for the 5th Month. The price on new apartment leasers declines again, but when do existing renters get a break?
• On March 7 I asked The Fed Chair Puts a Spotlight on Rent, Has Rent Really Stabilized?We can easily see the answer is still no judging from another 0.8 percent rise month-over-month in the shelter index in February and another 0.6 percent in March.

In his March testimony to Congress, Powell stated "And while housing services inflation remains too high, the flattening out in rents evident in recently signed leases points to a deceleration in this component of inflation over the year ahead."

Yep, prices increases have decelerated from +0.9 percent monthly to +0.5 percent monthly. 

Four Key Difference to BLS

1. Although Apartment List uses repeat rents of the same or similar unit and prices are are actual prices, not asking prices, it only shows new leases, not repeat leases.
2. Because new leases on vacant units rise much more rapidly than existing leases, its year-over-year numbers rise or fall faster and in greater magnitude.
3. The National Rent price reflects year-over-year changes, but in reality, people pay the same amount of rent for 12 months then there is one big price jump.
4. The National Rent prices are not seasonally-adjusted. The strong seasonal tendencies of Apartment List are smoothed over by the BLS seasonal adjustments. 

Those differences explain why it has been a mistake to place too much faith in the decline in national rent prices.

In October of 2022, I commented "The above chart provides a needed reality check to those who think rent prices are about to plunge based off Apartment List data."

And here we are, with national rent prices heading back up for four straight months.

But relief may finally be in sight. 

Record Number of Homes Under Construction

Housing units under construction, data from commerce department, chart by Mish

One of the ongoing memes is that rents will fall when units are completed. 

Multi-family units are now approaching a record even as single-family units are falling.

But rents have not declined despite a near-record units under construction, 1.4 million or higher since August of 2021.

Eventually, this supply will stabilize things, but the Fed needs more that stabilization with rent of primary residence still rising at a monthly clip of 0.5 percent per month. 

OK, When?

Agree with @JosephPolitano sentiment. One thing to note is that the original Q3’22 NTRR had rent slowing from 12% to 6%. The revised version has more like 12% to 10% in Q3 (eyeballing chart). Suggests a bit longer into 2023 to see bigger rent slowdown in CPI. H/t @BrettMatsumoto https://t.co/7GH5BfdGiq

— Omair Sharif (@fcastofthemonth) June 9, 2023

The idea that the price of new leases leads the way has certainly not lived up to its deceleration billing.

The Starter Home Is No More, Even in Second Tier Markets

In 100 of 100 markets, the average renter cannot afford a lower tier house.

Powell is waiting, and so are renters, because homes are miserably unaffordable with the average mortgage rate of 6.9 percent according to Mortgage News Daily.

For discussion, please see The Starter Home Is No More, Even in Second Tier Markets

Until the price of homes crash, or prices steady and mortgage rates crash, those looking to buy an affordable starter home will be out of luck.

This has widespread implications for household formation and the economy.

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