“Capital Insights” with Jack Kern
- Aug 26, 2008
Source: Bureau of Labor Statistics
Chart Title: CPI for 2008 Year To Date
Series Id: CUSR0000SA0
Area: U.S. city average
Item: All items
Base Period: 1982-84=100
What’s A CPI Guy to Do?
You know, sometimes it’s hard to be positive when the government statistics come out. Witness the chart above that demonstrates how the CPI is now running at an annualized basis of 5.6%. You have to go all the way back to around 1991 before you see results like this. I sometimes hear economists talk about the so called core CPI, which is ex-food and energy, which works fine if you live in cave and hunt for your dinner in the woods, but for the rest of us, costs are soaring. I think there is an interesting dynamic here and I have a few points I’d like to share with you.
First, about 29% of the CPI has been calculated using what are faulty measures of rents and the imputed costs of a rental equivalence number, something that has been the subject of great debate in the economics community. As a result, the CPI measures have been more volatile than they should have been. Next, the CPI, contrary to some press accounts, is not a measure of the "cost of living," but rather a separate metric to track changes in a market basket of goods and services.
The upshot of this seems to have a very curious effect on renters. When an owner tells a renter that the rent is being raised at the end of the term by 6%, the renter frequently retorts, "but the CPI only went up 3%, that’s not fair." Apparently a lot of owners then end up agreeing to an inflation adjusted rent increase and everyone is happy. Now that we’re hitting soaring inflations, the opposite track might develop.
Renter incomes are not soaring along with inflation and the likely impact is that renters will only agree in most instances to increases that track their wage growth, usually less than 3%. Professional owners are going to feel the pressure on NOI. My guess is, in most parts of the country, we’re going to see sub-inflation rent growth except in some very dynamic places, and hopefully inflation will recede.
Between the issue of inflation and interest rates, the Fed has few tricks left in the Bernanke shopping bag. Let’s hope Ben figures this out