October CPI report: Headline inflation up 3.5% annual rate, core inflation minus shelter up 2.8% annual rate over past 4 months

– by a New Deal Democrat

It’s been a whole year I noted the fact that the CPI’s official measure of housing inflation, “equivalent owner rent”, seriously lags actual house prices as measured by the most popular housing indices. I said then, and have said almost every month since, that because of this severe lag, OER would have risen to probably 7.5% y/y or more and dragged core CPI down with it. That remains evident in the October CPI report this morning.

Here are the titles:

Total CPI +0.4% +7.8% YoY (-0.4% YoY decrease from last month and down -1.2% from June high of +9.0%)

‘Core’ CPI +0.3% +6.3% YoY (-0.4% down from last month’s 40-year high)

The chart below shows the monthly change in headline (blue) and core (red) inflation since January 2021:

It is clear that there has been a significant delay in the last 4 months.

Equivalent owner rent rose +0.6% for the month, making it a new +6.9% all-time high on a yearly basis (just as I started forecasting a full year ago) compared to the FHFA purchase-only home price index (black, /2 for scale):

Here’s what core inflation looked like without OER m/m (it was unchanged!):

And on an annual basis (growth of 5.9%):

In other words, in in the past 4 months since gas prices peaked, headline inflation has increased at an annual rate of 3.6%. Core inflation minus OER increased at just a 2.8% annual rate.

Here are some other highlights from the report.

Energy prices increased by 1.8% for the month:

Used Vehicles: -2.4% +2.0% YoY (down from +41.2% in February

New vehicles: +0.5% +8.4% YoY (down from +13.2% in April)

The sharp year-over-year slowdown in used car prices doesn’t mean they’re cheap: They’re still nearly 50% more expensive than they were when the pandemic ended. But they are down about -5% from their peak in January. New vehicles are still very problematic:

In short, high inflation right now is primarily a function of housing. And while real home prices have eased slightly over the past few months and are slowing sharply year-over-year (but still up 12% from their peak of 20% year-over-year), using the dummy and lagging measure of housing – equivalent rent to owners from the Census Bureau continues to misrepresent the true picture.

To reiterate how I closed this report last month, in rising interest rates, the Fed is chasing a ghostly threat.

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