Addendum to my October 14 post (Rent Rant!):
Housing Costs, Inflation’s Biggest Component, Are Poised to Ease
The end is in sight for one of the biggest sources of inflation. Surging housing costs helped keep inflation high this year but have likely already swung into reverse, economists say.
The signal comes from private-sector indexes of rents on new leases, which tend to lead the consumer-price index measures by a little less than a year, said Alan Detmeister, economist at UBS.
“Last year we saw huge increases in these market rent measures in June, July and August, but they’re now coming in at or below their prepandemic pace,” he said. “That suggests we should now be past the peak for monthly CPI rent increases.” As a result, he predicted, inflation could be below the Federal Reserve’s 2% target by 2024.
The Fed is aware of the dynamics. Chairman Jerome Powell in a speech on Nov. 30 said, “As long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year. Indeed, a decline in this inflation underlies most forecasts of declining inflation.” (…)
Housing is influential because it is the largest component of the CPI: Tenants’ rent made up 7.4% of the CPI in September, and owners’ equivalent rent (OER), which measures homeowners’ costs, made up 24%. Shelter’s share of the core CPI, which strips out volatile energy and food prices, was an even larger 41.7%. As core inflation rose from 4.6% in October 2021 to 6.3% in October 2022, shelter inflation contributed around 1.4 points of the acceleration. (…)
I don’t pretend to be an expert on rent, although I was among the few to warn about the coming impact of rentflation in 2021. But if I look at the historical facts, I see a need to curb the widespread enthusiasm that rental stats are about to solve the inflation problem.
1. Expectations that rentflation will soon abate significantly are based on various private measures of “asking rents” for new leases showing that new leases are being signed at declining rates reflecting a saturated apartment market. These private surveys are fairly recent, mitigating their statistical usefulness.
3. The BLS, which produces the inflation data, reveals that, in the first half of 2022, 54% of lease renewals had a rent increase while 39.6% saw no change. The BLS says that same tenant rents rose 3.5% in H1’22 vs 12.2% for new tenants. The official CPI-Rent index rose 4.7% in H1’22 vs 6.2% for Core-CPI.
4. Pre-pandemic, CPI-Rent was rising a fairly steady 3.5% per year since 2015 vs 2.0% for Core-CPI.
5. There was therefore a tendency for rentflation to exceed core inflation before the pandemic, coinciding with a historically low rental vacancy rate since 2015.
6. The current rental vacancy rate of 6.0% in Q3’22 remains below its 2015-2019 average of 7.0% (blue dash line).
7. CPI-Rent has shown a very tight relationship with wage growth, particularly between 1990 and 2009, even as vacancy rates reached very high levels.
8. Since 2012, rent increases have exceeded wage gains by a significant margin, reflecting the very low vacancy rates.
9. The apparent coming “tsunami” of new apartment buildings (blue below) will provide some relief but rental costs are much more correlated with wages which have yet to show signs of a meaningful slowdown. Note how the increases in new apartment buildings did not prevent rent inflation (red) from accelerating in the late 1990s, the mid-2000s and between 2010 and 2016. Wage trends (black) had a much more significant and direct impact.
10. In fact, CPI-Rent is 99.8% correlated with wages.
Again, I’m no rent expert. Just observing that, when it comes to inflation, we should really focus on wages. The recent trends are not great…The Fed has its work clearly cut out and there are no two ways about it.
About one in four millennials are living with their parents, according to the survey of 1,200 people by Pollfish for the website PropertyManagement.com. That’s equivalent to about 18 million people between the ages of 26 and 41. More than half said they moved back in with family in the past year. Among the latter group, the surge in rental costs was the main reason given for the move. About 15% of millennial renters say that they’re spending more than half their after-tax income on rent. (…)
Chinese Exports Hit by Weak Global Demand and Covid Disruptions
Exports in dollar terms fell almost 9% in November from a year earlier, the General Administration of Customs said Wednesday — the biggest contraction since February 2020 when trade was hit by the first Covid lockdown.
The value of exports fell to $296 billion. That was the lowest level since April, when the lockdown of Shanghai closed factories, shut roads and stopped companies from putting goods on ships.
The slump comes during a time when exports would normally be rising strongly ahead of the Christmas and holiday season overseas. The decline in imports also widened to 10.6%, leaving a narrower trade surplus of $69.8 billion last month, the data showed.
The worsening trade performance is undermining a strong pillar of China’s economy over the last two years. Record rises in exports provided Chinese firms with stable demand, even as domestic spending struggled due to a housing collapse from last year and then increasing Covid outbreaks and lockdowns this year. (…)
China Scraps Most Covid Testing, Quarantine Rules China took another step away from its stringent Covid-19 controls, easing quarantine and testing requirements and curtailing the power of local officials to shut down entire city blocks and raise barriers to domestic travel.
We knew this would come: Accounting red flags abound among public crypto companies. (WSJ)