U.S. Inflation Looks Even More Tame If You Remove Housing Costs


(Bloomberg)—U.S. central bankers eyeing services inflation as a key gauge of price pressures may find it pretty robustuntil you take housing costs out of the equation.

Services prices excluding energy rose 2.9 percent in the year through April, but if you also remove rents they were up 2.3 percent, according to consumer price index data published Thursday by the Labor Department.

That second number was little changed from March, which removes some of the risk that the Federal Reserve will see an overheating economy that warrants stepping up the pace of interest-rate increases. The CPI report showed a broader measure of prices excluding food and energy rose a below-forecast 2.1 percent from a year earlier, a result that sent the dollar and Treasury yields lower.

New York Fed President William Dudley explained during a speech in January why policy makers are so focused on services inflation in particular: The Fed tries to keep inflation close to its 2 percent target by influencing labor-market conditions via interest rates, and services prices tend to be more sensitive to the labor market than goods prices.

And since goods prices have mostly been going down over the last several years, services inflation has to run higher than 2 percent for overall inflation to hit that target.

Once you remove rent of shelter — a category that mostly reflects housing rent, with a sliver representing hotel rates — the rest of the services sphere as a whole has seen no increase in price pressures in the last five years. Part of that is due to the prices of wireless telephone and internet services, which have been falling. Removing those from the calculation as well shows there was an acceleration in other services prices from 2014 to 2016, which has been followed by a steady deceleration for almost two years now.

Rental inflation accelerated in the 12 months through April, almost entirely thanks to the so-called owners’ equivalent rent component of the CPI.

Owners’ equivalent rent measures the price an owner believes he or she could obtain by renting out their home, and makes up about 24 percent of the overall CPI. Prices for actual rental units — also called rent of primary residence — make up another 8 percent of the index, and inflation for that component has mostly been decelerating over the past several months.

Usually when these two gauges diverge, it’s because either utility prices — which are stripped out of the owners’ equivalent rent component but not the rent of primary residence component — are moving around a lot, or because the supply of rent-controlled apartments is changing. That affects the rent of primary residence component but not the owners’ equivalent rent component, said Omair Sharif, an economist at Societe Generale.

The fact that the two usually move in tandem means the divergence in March and April raises an important question that will be key for the outlook for overall inflation in the coming months: Which is correct about the underlying trend?

To contact the reporter on this story: Matthew Boesler in New York at [email protected] To contact the editors responsible for this story: Brendan Murray at [email protected] Scott Lanman, Vince Golle

© 2018 Bloomberg L.P

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