Yahoo Finance

Let's hone in on the shelter component of August CPI data, the index rising half of a percent. The Bureau of Labor Statistics attributing it as the main factor in the items that we did see increase. Joining us now, we want to bring in Brian Rose. He's UBS Global Wealth Management senior US economist. And Brian, let's just start there when it comes to the stickiness of housing, how long it's going to be an issue, how big of a drag this will likely be in reports to come. What do you think?

Yeah, this is actually quite mysterious how is it things like OER are accelerating now. So the actual data on leases, you know, we have this high frequency data showing when people are signing new leases what their rents are. So that peaked out you know, almost two years ago. And to see the OER accelerating at this point is, yeah, very strange, very difficult to explain. There's a lot of nuances and unusual things in this data. It's very noisy, and there's also this question of when the pandemic hit and we had that big run-up in rents, the CPI seemed to lag behind the reality. And then there's this catch-up period, and it looked like that catch-up period was over, that we had caught up. But you see the data out this morning, it seems like, okay, maybe we haven't fully caught up to the sort of understatement that we had early in the pandemic. So, yeah, this has proven to be unusually difficult to predict. And, you know, overall, it, you know, we know from the lease data that this has to slow at some point. It will slow because the rents aren't rising very quickly, but exactly when this will happen, yeah, is is hard to say.

Yeah, yeah, and that that's exactly what I was about to ask you, Brian. Like, how much of a lag are we expecting between it actually showing up in this data? And then for the Fed to to recognize that reality of of the slowing and at least, perhaps, shelter not being the main factor that's contributing to the all items index?

Yeah, so already the lag between the reality and the CPI data is much longer than we've seen in the past. So, you normally expect it to lag by around 12 months, but it's lagging in this case by more than 18 months. And again, just there's this question of the catch-up to the rent increases early in the pandemic, and whether that process has has finished. But one important point in terms of the Fed is there's a real question as to how much the Fed should worry about this because, you know, OER isn't actually paid, right? This is sort of a theoretical cost, but it's not an actual cost. So, does it make sense to leave rates high because of this sort of theoretical cost of, you know, how much would it be if you were paying yourself rent for the house that you that you own? And I think to some extent, you have to look through this, and the Fed has talked about this, you know, we know the data is lagging, we know the data on new rental leases isn't isn't so bad. And if you, you know, look outside a shelter, right, the inflation rate, headline inflation 3.2, but without shelter, it's only 1.1% year over year. So there's a real question as to, you know, how much growth are we willing to sacrifice? How much pain are we willing to accept in the labor market because of, you know, this very technical increase in things like OER?