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By New_Deal_democrat May 27, 2015 12:43 pm
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US inflation is all about house (rent) prices

Last Friday's consumer inflation report was something of a puzzle.  Normally when producer prices decline, particularly as much as they did in April, consumer prices decline as well:

The below avove just shows the last 6 years, but the same has obtained in prior periods, and in particular during the gas price swoon of 1986.

The reason for the anomaly can be summed up in one word:  shelter.

Over the last year, consumer prices for everything except shelter (blue) have actually declined, while shelter costs have continued to increase at a brisk pace:

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Here is the same graph shown YoY:

Since shelter, measured as "owner's equivalent rent," is over 1/3 of the consumer price index, it is more than offsetting the decline in other prices.

What is paticularly problematic is that the increase in shelter costs isn't being driven by brisk demand -- after all, the average Millennial would find it almost impossible to purchase the average house -- but rather by a shortfall in supply, as housing inventory remains low by historical averages, and construction of apartments and condominiums has not taken up enough of the slack, driving rents to new highs as a percentage of income.

Since this is the main driver of core inflation, this is yet another reason why the Fed shouldn't be thinking about raising rates any time soom.

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