Weekly Updates
Weekly Updates
- The latest US consumer price data raises a real problem. A quarter of the consumer price basket is owners’ equivalent rent (OER). Rising over 7% per year, OER is pushing inflation higher. But OER pretends that homeowners rent their own homes from themselves. It is a fantasy price.
- For investors in US inflation-linked securities, or investors worried about US government spending levels, the fantasy still matters. The return on a US inflation-linked Treasury bond is tied to headline consumer price inflation. Much of US government spending rises in line with consumer price inflation, including the fantasy price.
- Investors concerned with consumer spending or economic growth should ignore fantasy prices. US homeowners have a fixed-rate or no mortgage. Their inflation reality is back to pre-pandemic norms. Inflation excluding shelter (a broader concept than OER) is just 2% y/y. Cities like Chicago or Minneapolis have inflation excluding OER around 1%. Homeowners’ real income growth is much stronger than headline consumer price data implies.
- Middle income households have an additional boost to 2024 spending power. Not only is their cost of living rising much less than consumer price data suggests, their tax bands will rise in line with consumer prices including OER. Homeowners get a real tax cut because of fantasy pricing.
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