An Inflation Silver Lining

If you squint, you can see it.

I wrote about the plunge in shares of Adobe (ADBE) this week, so check out this post if you’re interested.

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I’m sure you’ve read about how inflation came in much hotter than expected in August and how there’s no end in sight to these high prices. But I’m an optimist, so I’m always looking for the silver lining to things.

Here’s one silver lining that some people on Wall Street are talking about.

As you can imagine, the cost of shelter—whether it be a house or an apartment—makes up a big chunk of peoples’ cost of living. So naturally, the shelter component of the consumer price index has a really big weighting—more than 32%.

This shelter component of the CPI has just been absolutely taking off and it was up big time in August. It rose 0.7% from July to August and 6.3% from last August to this August, which is its highest year-over-year growth rate since 1986.

But here’s something interesting. The way the government estimates shelter costs is based on rents. That’s regardless of whether you’re renting your current place or you own your current place.

If you own your house, they’ll estimate how much you would have to pay if you were to hypothetically rent that house. It’s something they call owner’s equivalent rent.

So, in effect, rents drive the shelter component of the consumer price index. Here’s the thing, though. When you rent an apartment or a house, your rent doesn’t change that fast. It might go up once a year or maybe once every few years.

But if you sign a new lease, you’ll instantly be hit with higher rents based on market prices. In other words, new leases are extremely sensitive to market forces and they are a leading indicator for what happens to overall rents and the shelter component of the CPI.

Check out this chart which compares the growth in new lease rents (the Apartment List National Rent Index) versus the growth in the shelter component of the CPI.

You can see that new lease rents lead the shelter component of the CPI by seven to eight months. You can also see that the growth in new lease rents has started to roll over pretty significantly.

That’s why analysts at Apartment List believe that the growth in shelter prices within the CPI will peak in the next few months as well.

In other words, the growth in rents in already decelerating, it just has yet to be reflected in the government’s consumer price data.

Does this mean that overall inflation is going to roll over? Not necessarily. Inflation is really wide spread and it’s impacting prices all across the economy. But if we’re seeing a deceleration in major categories like rents and gasoline prices, that’s a big deal. Those two things alone make up 40% of the typical household’s cost of living.

It’s good to see them at least start to slow down.