CPI Preview and Owners Rent Equivalent

on Estimated risk per 08.11.2022 15:31:00

On Thursday, the BLS will release inflation data for October. The consensus is to increase the CPI by 0.7% and increase the core CPI by 0.5%. The general consensus is that the CPI should rise by 8.0% yoy and the core CPI by 6.6% yoy.

Here is a preview from Goldman Sachs economists Manuel Abecasis and Spencer Hill:

We expect Core CPI to rise below consensus by 0.44% (vs. %). We expect moderate increases in food and energy prices to lift the overall consumer price index by 0.49% (vs. by 7.9%).

We recently saw used car prices fell by more than 10% y/y, etc. lumber prices fell 33% y/y One key will be rent, especially owners equivalent rent (OER). In a Goldman note, they echoed Fed Chairman Powell’s comment that rents “are going to go up significantly”:

[W]We expect housing inflation to pick up rapidly (rent +0.78%, OER +0.75%) – even though alternative online measures of rent growth for new tenants have slowed because sustained tenant rent levels still have a long way to go to catch up with new market tenant rates..
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However, rental economist Jay Parsons argue rental data ‘to cool faster than Fed expects:

Rental loss Click on the graph to enlarge the image.

Here’s data showing that real rent inflation will cool faster than the Fed anticipated last week, and not just for asking rent:

We’re back to the long-term average of “rental loss”, which means the runway for rental renewals will shrink significantly going forward…

“Loss on rent” is the gap between today’s market-requested rent and the average local (embedded) rent (also known as “contract rent” that the CPI tries to measure). As a general rule of thumb, the larger the rental loss, the greater the renewal increase…

It was here Commentary by Fed Chairman Powell:

CHRISTOPHER RUGABER. Thanks, Chris Rugaber of the Associated Press. Let’s go back to housing for a moment. You mentioned the impact of higher housing rates, home sales fell 25 percent last year, and so on, but as you know, none of that is actually showing up. , in the government’s measures of inflation. And as we move forward, real-time private data clearly shows these hits to housing. Are you going to put more weight on this to establish things like whether there is an over-tightening going on, or will you continue to put as much emphasis on the government’s lagging numbers?

CHAIR POWELL. So this is an interesting topic. So I’ll start by saying that the measure that’s in the CPI and PCE covers rent for all tenants, not just new tenants, not just new leases. And it actually makes sense, because for that reason, conceptually that is, it’s kind of the right target for monetary policy. And the same is true for the owners’ equivalent rent, which is derived from the tenants’ rent revaluation. Private measures are certainly good at catching new leases, and they tell you a couple of things; first, once you, I think right now, if you look at the model of this series of new leases, it’s very pro-cyclical, so rents have gone up a lot more than CPI and PCE rents. And now they are falling faster. So, but what are you, it is understood that there are still as people, as long as new leases are renewed and expire, right? You are still, they are still in development, big rate hike coming. GOOD? But at some point, once you get through that, the new leases will tell you, they’re telling you that there will come a point where rent inflation starts to come down. But this point is far from where we are now. So we’re well aware of that, of course, and we’re looking at it. And we have, but I would say that in terms of the correct way to think about inflation is actually to look at the measure that we are looking at, but given that we also know that at some point you will see, how the rent will go down. .
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