In This Article:
Rob Arnott, Research Affiliates founder and chairman, joins Yahoo Finance Live to discuss inflation and how upcoming readings may be misleading, tech stocks, and the market outlook.
Video Transcript
JULIE HYMAN: I want to talk about where people might be seeing values in this market right now. And for that, we want to bring in Rob Arnott, Research Affiliates founder and chairman. Rob, it's great to see you. The sort of elements that have been dominating the market as of late, inflation, and to a lesser extent, or should I say, to a fading extent, Ukraine. Let's talk about inflation a little bit, first of all, because I know that you've been examining that issue. And I'm curious if there are things that people aren't fully appreciating or fully examining about the question of inflation.
ROB ARNOTT: Absolutely. One of the things about inflation that's interesting is that there are a whole array of components to it, some of which are inherently smoothed and lagged. Roughly 1/3 of inflation is shelter. That consists of home ownership or renting or home away from home, hotels and motels. And last year, we saw hotels and motels up over 20% in terms of inflation. Well, that's a market rate. Home ownership, which is much, much, much bigger, is not counted in CPI as the value of a home. Homes were up 19% last year and up 32% in the last two years, 2020 and '21 combined.
Now what the BLS does with home ownership is to ask, what would the home rent for? Now if you're a homeowner, you typically don't know. But they survey thousands of homeowners, and they ask a very simple question, what do you think your home would rent for? Now, if you're like me, I have no clue. And so I would just pick a number out of the air. Now if you pick a number out of the air, and you're asked again a year later, you're going to say, what did I say last year? Last year, I said 4,000. OK, I'll say 4,100.
Now, it's still a guess, and it anchors on the past. So owners equivalent rent in 2020 and '21 combined went up only 6%, while the value of homes went up 32%. Where is the remaining 26%? It trickles into CPI over the next two to four years with a lag. So there's 1/3 of CPI shelter, which is likely to come in at high single digits at best over the next two to three years. So this is not transitory.
There's another thing that's often not understood, and that is, every month, when we see a CPI report, we're adding a new month, and we're dropping an old month. What's the old-- how did we go from 7.9 to 8.5? We dropped to 0.7 inflation for one month and replaced it with a 1.3. The next three months were going to be replacing months that are 0.8, 0.8, and 0.9. Big inflation last year in the second quarter. And so we're going to see an illusion that inflation is subsiding and receding, followed in the summer by an illusion that inflation is breaking out because we're replacing low inflation months, 0.5, 0.3, and 0.2.