Can Hedonism affect CPI? Yes, it can…
Well…not “hedonism” in the pleasure-at-all-costs-kind-of-way but Hedonic pricing, which is how CPI is constructed. Without getting too deep into the math behind it, we can say that it tends to underreport the actual number.
As most of you have seen, July CPI was +5.4% year-on-year. While that is certainly high and higher than expectations, we feel that the number is too low OR will really surprise on the upside in the future.
Rents (or Shelter as it’s defined) are about 30% of the CPI basket. Meanwhile, in July, rents rose 8.7% year-over-year for 2 bedroom apartments. and overall 2.5% month-on-month. Elsewhere, The Fed expects future rental prices to rise 4.5% in coming years! Yes, the Fed expects future rental inflation to be 4.5%.
The largest single-family homeowner in the U.S. with over 80,000 units which it rents out, Invitation Home, says new lease rentals rose +14%! To put it in a different way, if a home was $1,000 to rent a month last year, it would cost $1,140 a month now!
Meanwhile, exogenous events such as the Delta Virus outbreak globally will put further strain on the global supply chain, causing cost-push inflation.
Last but not least, does anyone think that used cars costing more than new cars in America makes sense?
So, if you ask me if 5.4% is a real number…I would say no.
2020s are the new 1980s
Many of you would have heard us discuss this over the past 18 months – the upcoming economic cycle will be very similar to the 80s recession, where rental yields skyrockets since no one could afford to buy a home (high rates + recession).
Buying rental property right now in the U.S. is one of the best trades we can have at the moment!
Heck, even Steven Cohen has joined the bandwagon.
*Sources: CNBC, WSJ, Bloomberg