As of me writing this post this morning we are awaiting the Consumer Price Index (CPI) for May 2023 to be released.
What is CPI? It is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
The CPI includes eight categories of goods. The CPI represents all goods and services purchased for consumption by the reference population.
BLS (Bureau of Labor Statistics) has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls.
Why is the CPI important?
The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation’s economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.
The government and the Fed has been working to bring the CPI back to the goal of 2% for over a two years now. But it continues to be well over 4%. And unfortunately our dishonest government doesn’t include a true number for housing into the calculation. The government uses a calculation called Owners’ Equivalent Rent (OER).
So to calculate the number they do call on people paying rent to landlords, but to equate for home owners in the calculation they use OER. Which is owner’s equivalent rent for owner-occupied homes using the average rents paid for comparable rental housing within the same area.
The problem with this measurement is comparing renter only dwellings to owner occupied homes rent equivalents is like trying to compare apples to oranges. So the measurement is no where close to what it really is in real time.
The image below shows how the eight categories in the CPI are weighted to make up the CPI number. Housing obviously represents a large portion (42%) of the the CPI number.
So if it is not correct then the entire CPI number is fake.
This is why inflation will continue to persist.
You can’t fix something that your aren’t measuring correctly. And right now the government doesn’t see any reason to change how they are measuring housing in the CPI number.
Secondly, our zoning laws and regulations are preventing additional housing from being built. We will continue to have a shortage of housing, especially as the population continues to grow in cities where people want to be.
Lastly, with inflation being high. We will continue to see the Fed trying to slow it down by driving up interest rates. As interest rates continue to increase there will be less people able to afford a house. Which will lead to more people renting versus buying. And this will continue to drive up rent prices, because the people who can afford to purchase a house and decide to rent it out, will have higher carrying costs for the that asset.
So it is just a constant and vicious circle.
My advice is simple. Buy income producing assets now. It is the best hedge against the run away spending that will never end in Washington DC.
To your success and your future.
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