On September 11, the Bureau of Labor Statistics (BLS) released its new monthly report on the CPI, with data through August.  A number of recent posts on this blog have discussed the CPI figures, how the CPI is calculated, and the important role in the last few years of the price of the shelter component of the CPI (housing, basically).  This short post will provide an update with the more recent figures.

Inflation has dropped sharply this year.  In terms of the most recent 6-month period (i.e. February to August), the overall CPI has grown at an annualized rate of only 2.0% (or 1.98% to be more precise).  A 2% rate is generally seen as an appropriate target – as lower inflation than this can complicate macro management – so this is significant.  While the Fed focuses its attention on a different index of inflation (the deflator for Personal Consumption Expenditures in the GDP accounts, and on the core index that excludes food and energy prices), the Fed of course looks at a wide range of indicators, and not just of inflation, as it makes its decisions on monetary policy.  The 2.0% rate for the overall CPI matters.

As has been the case since mid-2022, increases in the cost of shelter as estimated by the BLS have kept the CPI higher than it otherwise would be.  But inflation in the cost of shelter has trended downward this year, from a 6-month rate ending in January of 5.6% (annualized) to a pace of 4.6% in the most recent 6-month period ending in August.  And inflation in the everything-but-shelter component of the CPI is now only 0.5%.

As was discussed in my earlier post on methodology, the cost of shelter component of the CPI is based on data gathered on what actual rental payments are for housing, and then applying these (after adjusting for quality, location, and other differences) to impute what rental “payments” would be for owner-occupied homes.  Those imputed “payments” are then counted as part of household incomes in the GDP accounts, as if they were a payment from the homeowner to themselves for the right to live in their homes.  This is not unreasonable, as homes do provide an important service, where the stock of owner-occupied homes contributes to the living standards in the country and hence to GDP.  The approach taken provides an estimate of the value of those services, which is reasonable.  (Note that the Bureau of Economic Analysis (BEA) of the Department of Commerce, not the BLS, is responsible for the GDP account estimates.  The BEA follows a similar approach, however.  See my earlier post on methodology.)

But one should also recognize implications that are often ignored.  First, while inflation in the cost of shelter might be “high”, that inflation is a wash to homeowners as they receive in “income” the same that is being “paid” in rent.  Of course, in reality such rents-to-yourselves are neither being paid nor received.  Rather, the point is that homeowners are paying no more for their shelter no matter what inflation rate is recorded in the shelter component of the CPI.  And the shelter component accounts for a very high share – 36% – of the overall CPI.

Second, from a longer-term perspective, homeowners will gain as prices in this shelter component of the CPI rise.  Rental rates are increasing and hence their homes are becoming more valuable.  Home prices will appreciate, and homeowners will be able to sell their homes for a price that is higher than what they paid.

[Side Note:  Some might mistakenly jump to the conclusion that if the homeowner will be buying a new home when they sell their old one, they will lose due to the now higher prices.  That is mistaken.  To the extent the new home is similar in size and quality to their old one, then the transaction would be a wash, as what they would receive on their old one would be similar to what they would need to pay for their new one.  It would be only in cases where they would want to move to a larger or fancier home that they would then pay more for the increment in “housing” that surpassed in the new home what made up their former home.]

That is, homeowners gain to the extent that home rental rates – and hence the shelter component of the CPI – go up.  Their homes have become more valuable.  Higher rental rates, and hence increases in the shelter component of the CPI, are certainly a cost to those who rent.  But those who own their home, and see the value of their home appreciate with the increases in the rental rates, will gain.  One is the mirror image of the other.  And with homeowners making up 66% of households in the US (according to US Census Bureau figures), the homeowner side of the issue should not be ignored.

There are certainly distributional issues here to be noted.  Homeowners and renters sit on opposite sides of what they should want to see in home prices.  Homeowners would like those prices to rise, while renters would rather that those prices (and hence the rents they have to pay) fall.  Socially, one should also recognize that homeowners in general enjoy higher incomes than renters.  Thus higher home prices will benefit those with on average higher incomes than the incomes of those who rent.  But the key point to recognize is that there is such a disparity of interests.  There are those who gain, as well as those who lose, by a more rapidly growing cost of shelter in the CPI.

Housing is important, and constitutes a high share of the overall CPI.  Because increases in rental rates are still, as measured, growing at a 4.6% annual rate over the past half-year, the overall CPI rose at an annual rate of 2.0%.  But for homeowners – who are not actually paying more for their shelter as the imputed rental rates rise – the relevant measure for their cost of living is the CPI for everything but shelter.  And the everything-but-shelter portion of the CPI has increased at an annual rate of just 0.5% over the past six months.  That is well below any 2% inflation target, and indeed, is getting pretty close to zero.