Why the Fed Chases Its Tail: Rent Measures vs. Case Shiller

The Rent Café gave me their weighted national rental price data. Let's compare to the CPI and Case-Shiller home prices.

Rent Café vs Owners' Equivalent Rent vs Rent of Primary Residence

Data courtesy of the RENTCafé and the BLS Owners' Equivalent (OER) via Fred the St Louis Fed repository.

The expenditure weight in the CPI market basket for Owners’ equivalent rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence:
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

OER is the largest single component in the CPI. It makes up 24.28% of the index. The CPI category, rent of primary residence is 7.8% of the CPI.

January 2018 Year-Over-Year Comparison

OER Substitutes

  • CPI-U Using Rent Café: 1.97%
  • CPI-U Using Primary Rent: 2.19%
  • CPI-U Using Case-Shiller: 2.85%

The direct cost of purchasing a house is not in the CPI because the BLS considers housing as “capital goods”.

Tail Chasing Exercise

Whether or not one agrees with the BLS treatment, the Fed made a huge mistake ignoring escalating home prices in the housing bubble years.

And they are doing it again now. Another round of asset bubble deflation is coming up.

The Fed chases its tail in a perpetual cycle looking for inflation, not noticing the obvious, measurable price inflation in home prices and other assets.

Mike "Mish" Shedlock

No. 1-15

Of coarse, one size doesn't fit all. Rent and home prices have gone sky high in the San Francisco Bay area. --- Uh they have been 'sky high' in the bay area for the past 5 years nothing new there. Check out rents in Manhattan and in the greater Boston area (which are much higher)




Rents have been skyrocketing for most of the 2010's. As I have observed, rent in the $2,000's now per month is the new 'normal' in most cities. In Manhattan (and most of broooklyn $3500 - $5000 is the 'new normal (for a small unspectacular one bedroom apartment.. Once thing seems certain, an apartment that rents for three figures a month has gone the way of the 10 cent parking meter in Manhattan


“The deflator doesn't ever attempt to define what is or isn't part of inflation; instead, each person that purchases a good or service defines what is or isn't part of inflation.”

Including stocks, bonds and land titles, I presume……..

Probably not entirely fair, as those aren’t counted as part of GDP either, and the deflator was never intended to be relevant outside of the context of GDP. But that just gets to the crux of the problem: GDP itself. Or, more to the point, the unwarranted significance attributed to GDP as some sort of final measure of the health of “the economy.” GDP itself may be a useful measure for some things. (Although I’d be hard pressed to come up with exactly what, in an age of ever increasing activity being performed simply to not slip too far back on the treadmill of ever increasing roadblocks, mandates, taxes, pillage by ambulance chasers and others, and regulations. All of whom decrease utility without a similarly negative effect on GDP. As an aside, the result that “activity” is a valid approximation of economic health, is justifiable in a completely free world, where no choice is coerced, no act mandated nor encouraged above others, no action barred nor discouraged etc. Pretending the same holds true in of world of officially set prices; 5 year plans dictating production and mandating consumption; rules, regulations, taxes; as well as all outcomes being dictated by government policy rather than unconstrained market mechanisms; is just intellectually dishonest hand waving, obfuscation and sleight-of-hand.)

But I digress. Back to the deflator: Since GDP doesn’t include changes in the value of “assets,” neither does the deflator. Yet an increasing share of people’s de facto income (as in delta wealth + spending over a period), derive from just such asset price increases. While a similarly increasing share of people’s expenditures and economic activity, is directed towards buying, selling and researching things classed as assets. With the result that the supposedly “all inclusive” GDP deflator, not only is much less than all-inclusive; but is, in fact, becoming less and less all-inclusive over time; as a realistic measure of the change in prices for what people actually spend their money on.


"The fundamental silliness is attempting to classify some things as part of inflation, some not." And that is the flaw of the CPI. By working from a market basket, they have to begin by defining exactly what is or isn't part of inflation. If it's not in the basket, it doesn't count. If it is in the basket, but you personally don't buy it, it doesn't matter, because it does count. The faster they do substitutions, the closer it gets to what our real spending patterns are, but then people object to that, too, because the substitutions don't fit their specific spending pattern. For example, if 90% of the country switched to electric cars, the 10% who still ran gas engines would complain if the CPI market basket added more electricity, and decreased the petroleum component (even though that substitution would be entirely appropriate).
Since the GDP deflator doesn't work from a market basket, but rather from the entire GDP, it doesn't reflect any specific market basket, but rather what the entire economy purchased. The deflator doesn't ever attempt to define what is or isn't part of inflation; instead, each person that purchases a good or service defines what is or isn't part of inflation.