While most gauges of U.S. rents and home prices are surging — some at double-digit rates — the government’s consumer price index shows housing costs rising at a much tamer pace, a disparity that’s getting some high-profile attention.
“Rent of shelter” — a category that makes up a third of the CPI basket of goods and services prices — is up 3.9% from November 2020. That’s the most in 14 years but still pales in comparison to many private-sector metrics. That’s caught the attention of prominent voices like Lawrence Summers and Bill Ackman.
We have all seen house prices & rents soar. Home prices based on Case Shiller are up 15 to 20%, as are rental prices, as reported by the nation’s largest landlords. If we assume 17% residential inflation, both CPI and core CPI would have exceeded 10 percent last month.
— Lawrence H. Summers (@LHSummers)December 13, 2021
Housing inflation is unlikely to abate based on supply and demand trends. The inflation that households are actually experiencing is raging and well in excess of reported gov’t statistics.
— Bill Ackman (@BillAckman)December 10, 2021
A large part of the gulf between the two stems from how the CPI housing components are calculated.
“Every month, only about 10% to 15% of the sample actually represents new renters,” Omair Sharif, president of Inflation Insights LLC explained on Bloomberg’s “Odd Lots” podcast in September. As a result, the list prices that may be rapidly changing instead show up over the course of about 12 to 18 months in the CPI, he said.
Put another way: “The CPI aims to measure rents on all units, newly occupied or not. The latest twitch in the management company’s front office may not be relevant for the bulk of renters until many months later, when their leases turn over,” Bloomberg Economics’ David Wilcox wrote last week.
What that does mean though is that housing costs are expected to keep the CPI elevated well into next year.
By next summer, Wilcox estimates the main CPI housing components could be running in the 6-7% range, faster than any other time in the last 30 years. That includes both the “rent of primary residence” index, the government’s equivalent of what most view as rental prices, and “owners’ equivalent rent of residences” — a measure meant to capture changes in home prices.
