Weekly Updates
Weekly Updates
- Asset prices have no place in consumer price inflation. If asset prices go up, asset owners have more spending power. If consumer prices go up, consumers have less spending power. Real estate is an asset. Real estate prices are the reverse of what consumer price inflation measures.
- Nonetheless, the cost of owning a home cannot be ignored. Nearly a quarter of the US CPI basket is owners’ equivalent rent (OER). This pretends that homeowners rent their own home from themselves to measure the price of living in a house, without including the asset price of real estate. It is a fantasy price no one actually pays. The OER could be substituted with house prices in Westeros for all the relevance it has to US households’ cost of living.
- This consumer spending power for homeowners is not as bad as CPI might suggest. To the extent that CPI surprises because of OER, consumer spending power is likely to be a positive surprise to markets.
- The Fed cannot lower OER by raising rates. In fact raising rates may push the OER higher. Higher borrowing costs may encourage people to rent rather than buy. That pushes up market rents, which ultimately pushes up the rent that homeowners pretend to pay themselves.
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