Is Housing Holding Back Inflation?

Today the Bureau of Labor Statistics released the consumer price index (CPI) numbers for April, which generally gives us the best picture of inflation.  The headline number is that between April 2010 and April 2011, consumer prices increased 3.2 percent, as measured by the CPI.  Obviously this is well above 2 percent, the number Ben Bernanke defines as “price stability.”  Setting aside the reasonableness of that definition, there is definitely some mild inflation in the economy.

Also of interest in the April numbers is that if you subtract housing, which makes up over 40% of the weight of the CPI, then prices increased 4.2 percent — twice Bernanke’s measure of stability.  What has always been problematic of the housing component is that its largest piece is an estimate of what owners would pay themselves if they rented their own residence.  This estimate makes up about a fourth of the CPI.  As the chart below demonstrates, for much of 2010, the direction in this number was actually negative, which held down CPI over the last year.  The current annualized figure for owner’s rent is 0.9 from April 2010 to April 2011.  Oddly enough, this is below the actual increase in rents, which was 1.3.  For most homeowners, the real cost of housing — their mortgage payment — has likely been flat, not decreasing.  So whatever benefit there has been to declining housing costs, most consumers are unlikely to feel any benefit from those declines, if they are actually real.

While the primary driver of CPI has been energy costs, food prices have also garnered considerable attention.  Excluding food from the CPI does not change the headline number, although this is due to the fact that the cost of eating out has been rising considerably slower than the cost of eating at home.  So as along as you’ve been eating out every night, you’ve apparently been fine.  This touches upon what is one of the less recognized features of current inflation trends:  the regressive nature of these prices increases.  If you rent, then you’ve seen costs increase more than if you own.  If you mostly eat at home, then you’ve seen prices increase more than if you dine out a lot.  If you have a lot of leisure time, the you’ve gained by the decrease in reaction prices.  While I don’t think one’s position on inflation should be driven purely by distributional concerns, the fact that working middle-income households have been hit harder by recent inflation trends than higher-income households should cut against the claims that inflation is somehow good for the poor or working class.