In response to my previous post on the July CPI, MarketWatch's Rex Nutting asks (in the comment section):
The figures certainly look bad. But I still wonder what the impact has been from the distortion in owners equivalent rent. OER and rents each went up 0.4% in July so it makes sense that the median CPI also went up 0.4% because shelter is such a huge part of the CPI (about 30%).
Isn't the rise in OER also a temporary factor, just as the decline in apparel was in July? And isn't it also an inflationary factor that can't really be solved by higher rates?
It turns out that the median CPI last month was actually rent, not OER. But the point is still well-taken. Over the Great Housing Boom of the New Millennium, rents have seemed quite low relative to housing prices, but they have been increasing at a pretty good clip this year. Here's a picture, from the Cleveland Fed's July issue of Economic Trends:
To the extent that those rent increases are catch-up, we would indeed guess that the process will play itself out soon enough (assisted, no doubt, by moderating/stalling/falling housing prices).
But that is the crux of the issue: What fraction of largish price changes -- appropriately weighted for their importance in consumers' market baskets, as Rex correctly reminds us they should be -- can we comfortably attribute to stubbornly persistent, but temporary, factors? I don't really have an answer to that, so I'll let you decide for yourself:
By the way, you guys really should be eating more fresh fruits and vegetables.