The CPI data category “Owners’ Equivalent Rent” (“OER”), uses data derived from surveys of homeowners in select markets rather than real world data. This technique allows the BLS and the Federal Reserve to understate price inflation.
OER understates CPI by 1% or more. September’s 5.4% CPI increase was understated by at least 1% per our math in reviewing the Owners’ Equivalent Rent category, which grew 2.9% over the period with a relative weighting of approximately 24%.
Cherry-picking methodology favors the Fed’s story. The BLS’ methodology for measuring year-over-year price changes in OER is to utilize homeowner survey data from select markets (read about the BLS’ methodology HERE).
We reviewed real world Zillow data to measure rental price increases. Zillow’s “ZORI” index shows significantly higher rental price increases, specifically, a 7.4% year-over-year price rental price increases across the U.S. (vs. the 2.9% CPI figure). Weighting the 7.4% and 2.9% figures at the CPI’s 24% relative weighting results in a 1% delta that benefits the Fed’s tale of moderate inflation. Further, if we were to cherry pick certain markets from Zillow’s ZORI index as the BLS does with its OER survey effort, we could arrive at an aggregate rental price change in the double-digit percentage range (pre-weighting), as there are a number of metro areas with year-over-year rental price increases in the 11%-20% range. For example, if we cherry picked markets to arrive at a pre-weighted price increase of 15% (3.6% post-weighted), this would add 2.9% to the reported 5.4% CPI figure.
Reported CPI food figures are even worse in terms of understating the CPI. A 4.5% price increase for groceries? That CPI figure is laughable. Our grocery bill is up by more than 40% year-over-year.
Price inflation is going higher. The capital from the $1 trillion Infrastructure bill has yet to be printed and deployed to say nothing of the forthcoming $2 trillion green/social spending bill. This additional $3 trillion in capital will be printed by the Fed (Treasury certainly does not have the capital to spend), without a commensurate increase in productivity. The result therefore can only be further price inflation of goods and services.
We believe the 5.4% CPI figure is actually closer to 10-15% and going higher. This outlook combined with a weak Real GDP backdrop equals Stagflation.