CPI Preview: Watch For A Jump In Non-Transitory OER

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CPI Preview: Watch For A Jump In Non-Transitory OER

While goods prices are hogging the spotlight at the moment, rental inflation is a far bigger and more important driver of the medium-term inflation outlook.

As we discussed in great detail recently (see “What Rental Hyperinflation Looks Like: “Soaring Prices. Competition. Desperation“), the buzz has been one of rising, sorry, exploding rents and as BofA observes today picking up on our earlier notes, a number of high-frequency rent trackers show the rental market bouncing back with a vengeance. As shown below, the Zillow Observed Rent index rose 1.9% mom NSA and 9.2% yoy in July, while ApartmentList rents were up 2.3% mom NSA and 12.5% yoy in August.

Press releases from subscription-based sources CoreLogic and YardiMatrix paint the same picture, with the CoreLogic Single Family Rent index up 7.5% yoy in June, YardiMatrix single family rents up 13.9% yoy in August and multifamily rents up 10.3% yoy.

Needless to say, these numbers are clearly far and away higher than what we are seeing in OER inflation. There are two important considerations when translating the high-frequency data to OER, which tends to have a much smoother and lagging trajectory.

  • First, the BLS collects rents on a 6-month rotating basis and converts the 6-month change into a monthly change.
  • Second, these high-frequency rent trackers reflect market rents, or rents that a new renter would pay, which are more volatile than the rents paid by existing renters (i.e. those who do not move).

That said, BofA believes – as do we – that the signal from the high frequency data is informative for the outlook and suggests OER can surpass the prior business cycle’s high of 3.6% yoy. In fact, OER could easily reach 4.5% yoy (or higher) next year, which would imply average monthly growth of 0.37%. This reinforces an issue that we have been flagging for a couple of months: while the debate around inflation seems to be focused on when and how quickly “transitory” factors will normalize, “persistent” inflation has steadily moved up to a historically elevated rate.

Meanwhile, despite the Delta disruption, the economy is expected to grow above trend for the next several quarters. Therefore underlying inflation – especially for sticky items like rent – will continue to rise, keeping the Fed on track to start hiking in 2023.

Rent aside, today’s CPI report, which is expected to show a fourth month of U.S. inflation at 5% or more, will shape investor expectations about the likely timing of the Fed taper. In terms of what to expect, DB’s economists think there’ll be a deceleration in the month-on-month figures for both headline CPI and core CPI, which should largely be a function of demand continuing to soften in Covid-affected sectors. They see the monthly readings at +0.4% for headline and +0.2% for core, both of which would be the slowest in six months; the YoY print is still expected to be 5.3% and 4.2% for headline and core respectively.

That said, US inflation has had a regular habit of surprising to the upside in recent months, and you have to go back all the way to November’s print to find the last time that month-on-month headline CPI came in beneath the median estimate on Bloomberg.

Tyler Durden
Tue, 09/14/2021 – 08:21



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