CPI Inflation Hits 40-Year High, But Even That Number May Be Too Low

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Inflation in the US increased by 7% annually for December, the highest rate returning when Reagan was US president in June 1982. However, there may be a problem with the Consumer Price Index (CPI) inflation estimate. This may be an underestimate of the rising cost of housing.

Unfortunately there is some risk that housing and rental cost inflation could exceed the 7.0% annual growth reported for December 2021 as suggested by several industry sources and indices. This is because the cost of housing in the CPI index is rising by just 4% while industry sources see prices up 20%. a major difference.

housing cost

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As you might expect, housing costs (called “shelters” CPI Report) make up a large portion of inflation estimates. This is because people typically spend a large part of their budget elsewhere to live, whether it is buying a home or renting.

The cost of housing is about a third of the inflation price index because so much money is spent on housing. So fluctuating house prices can cause the rate of inflation to rise greatly. So let’s take a look at some projections of how home prices are going to rise.

Housing cost estimation – from +17% to +20%

An estimate of house prices comes from Case-Shiller House Price Index, These prices have increased by about 17% to 20% for the past 12 months, depending on the exact index used, slightly lower for the top 10 or 20 markets, higher for the broader US valuation. Now that’s not quite apples to apples. Since the Case-Shiller series is updated for October 2021, as of the time of writing, therefore 2 months behind the CPI series. However, this should not fundamentally change the picture. for example, Zillow’s data Home prices have risen 19% year-on-year as of November 2021.

Rental cost – from +13% to +21%

Now, rental costs shouldn’t be much distracted by changes in home prices over the long term, but Zillow
With
Is rental cost Up to 13% for 12 months till November 2021. ApartmentGuide is in Rental cost from 17% to 21% For the year to December 2021 for 2-bedroom and 1-bedroom apartments respectively. Again, though, a similar picture from all these industry sources, shelter costs well into the double digits.

Different industry estimates, but nowhere near +4%

Clearly, you can track shelter costs in different ways and not all chains will align perfectly. Nevertheless, we have a series of points pointing to an increase of approximately 13% to 21% in housing and rental prices for 2021, with some variation in what is being measured and the date reported, whether it is October, November or is measuring up to December 2021.

Still, the cost of shelter was rising by only 4.1% in the most recent CPI inflation report. This is a considerable difference from other estimates, with housing costs rising from 13% to 21%.

high cpi load

Moreover, this component of inflation is what really matters. It ranks third on the CPI Inflation Index. So if, for example, the cost of housing is increasing at a rate of 17%, rather than the 4% CPI number in the average data we just discussed, then applying a 33% index weighting and non-indexing Keeping shelter costs at the same rate as the CPI report, which would put overall inflation at 11% instead of about +4% higher by about +4%.

Yes, 7% inflation is a concern (and one reason the Fed plans to raise rates in 2022), but 11% is pushing historic peak levels. These types of numbers are close to that of a post-war rivalry. extreme US inflation During the heights of inflationary growth of the 1970s and 1980s.

some good news

While this is a cause for concern, as high inflation is almost never good for economies and financial markets, there is some good news that many economists expect CPI inflation to subside from here as 2022 progresses.

In fact, the monthly rate of price increase for December 2021 was slightly slower than the multiple month-to-month price increase for 2021. So, even if inflation is set to boost, housing prices may work their way up over time. The CPI index, other components, may moderate from current levels offsetting some higher potential upside gains.

Still at 7% inflation, which is historically high in US terms, there appears to be a potential risk that inflation is being underestimated today because house prices are far higher than the CPI figures. grow.

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