WHY RISING RENTS HAVEN´T PUMPED UP INFLATION / THE WALL STREET JOURNAL

October 22, 2014, 2:16 PM ET

Why Rising Rents Haven’t Pumped Up Inflation

By Kathleen Madigan

 

Policy makers and economy-watchers now seem more worried about disinflation rather than accelerating inflation. That wasn’t the expectation at the start of the year. In January, economists surveyed by The Wall Street Journal expected inflation–measured by the consumer price index–would end 2014 at a 2.3% annual rate, up from the 1.5% rate of 2013.

Instead, inflation through September is running at a 1.7%, according to Wednesday’s CPI report. Core inflation, which excludes food and energy, also stands at just 1.7%.

One reason that inflation was forecast to accelerate this year was the expected increases in the cost of putting a roof over one’s head.

The Labor Department asks homeowners to estimate how much it would cost to rent their own homes. In a period of still-rising home prices and greater demand for rental properties, it is not surprising that the estimates–called owners’ equivalent rent–are rising this year. For the 12 months ended in September, OER is up 2.7%, up from 2.2% a year ago. (Actual rent paid by tenants is up a faster 3.3%.)

OER is the big gorilla in the inflation room. It accounts for 24% of the total CPI and 31% of the core. So why isn’t the accelerating OER rate pushing up the core? Because other factors are offsetting the upward push.

The biggest drag is the downward pressure on goods prices coming from overseas.

Excluding fuel (which has been falling on its own), the average price of imports hasn’t increased since March, according to Labor Department data. That reflects the stronger dollar, falling commodity prices, as well as foreign producers guarding U.S. market shares as their domestic demand flags. In turn, the CPI for all core goods is down 0.3% for the 12 months ended in September.

On the service side, other major categories have seen a slowdown in markups. Prices of medical services are up just 1.7% year over year, versus 3.1% a year ago. Education and communication services increased 1.8%, down from 2.0% a year earlier. Recreation services are rising 1.3% versus 1.7%.

Altogether, service prices less the rent of shelter increased 2.0% in September, down from 2.6% in September 2013. The disinflation among services coupled with outright price cuts in goods has overwhelmed the upward push from rents. These trends are likely to continue until global economies are growing in better sync.

Rising shelter costs, however, put a crimp in the outlook for U.S. consumer spending. Households are paying more to keep roofs over their heads, leaving less money to spend elsewhere. Luckily, falling gasoline prices will ease some of that squeeze as consumers head into the important year-end holiday shopping season.