April 23 (Bloomberg) -- Rising home vacancies may be a blessing in disguise for Ben S. Bernanke.

A record number of empty homes across the U.S. will depress rents, the largest item in the Labor Department’s consumer price index, into 2010, analysts said. That offers the Federal Reserve chairman plenty of time to withdraw the cash he’s pumped into financial markets.

“There’s just so much slack in the economy, including the high level of vacancies, that the Fed doesn’t need to worry about inflation for a while and will have loads of time to remove all the stimulus,” said Jim O’Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut.

A record 19 million homes stood empty in the last three months of 2008, up 6.8 percent from the same period a year ago, according to figures from the Census Bureau. The share of houses for sale that sat vacant rose to 2.9 percent, the highest level in data that goes back to 1956.

Actual home and apartment rents, together with an imputed value for owner-occupied homes called owners’ equivalent rent, account for 30 percent of the consumer price index.

“CPI will continue to be dragged down as OER, owners’ equivalent rent, continues to fall,” Dominic Konstam, head of interest-rate strategy in New York at Credit Suisse Group AG, said in an April 21 interview with Bloomberg Radio. Some deflation, or a broad-based decrease in prices, “is inevitable,” he said.

Fed Call

Konstam, a former Oxford University lecturer who has held his current post for a decade, predicted the Fed “will be slow to raise rates,” in an April 17 research note. “Even if they decide to do something” next year to withdraw surplus cash and drive short-term interest rates higher, they may still keep down long-term rates, he said.

Inflation excluding food and fuel, which ran at an annual rate of 1.8 percent in March, may slow to 0.5 percent, according to Konstam. The Fed’s implicit target, as reflected by their long-range forecasts for a separate measure of inflation tied to consumer spending, is a range of 1.7 percent to 2 percent.

Owners’ equivalent rent rose 2.1 percent in the 12 months that ended in March, approaching the record-low 1.9 percent annual gain in January 2004. Consumer prices as a whole in March were down 0.4 percent, their first 12-month drop since 1955.

New Report

As landlords who have been trying to fight price declines finally capitulate, rents may fall further in coming months, analysts said. The Census Bureau report on first-quarter vacancies will be released on April 27.

“You’ve got vacancies in both the owner-occupied market and in the rental market above historical levels,” said Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York. “From the Fed’s perspective that means the risk of deflation is going to grow and the risk of inflation is going to decline,” he said.

Vacancies are expected to continue to rise along with unemployment and foreclosures, economists said. The jobless rate jumped to 8.5 percent in March, its highest level in a quarter century. Foreclosures rose to 3.3 percent of outstanding loans in the fourth quarter, the most since records began in 1979.

“We’re talking about people who are somebody’s roommate or are living in their parents’ basement because they don’t have a job,” said Mark Obrinsky, chief economist at the National Multi Housing Council in Washington. “With the economy as weak as it is now, we will see vacancy rates higher than they were last year and rents will be lower.”

Average Rent

Rents began falling in the fourth quarter of 2008 and the drop has accelerated in recent months, according to MPF Research, a Dallas consulting firm that tracks the apartment market. The average monthly rent in March was $1,006, down 1.6 percent from a year before.

To combat the economic downturn and credit crunch, the Fed has increased its balance sheet by $1.2 trillion in the past year and expanded the nation’s money supply. Reserve balances may grow by an additional $2 trillion by the end of this year as the central bank buys more government debt and expands its credit program, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York.

Investors, concerned at the danger of resurgent inflation as a result of the record cash injections, have snapped up Treasury Inflation-Protected Securities. The return on TIPS, which pay out more in lockstep with increases in consumer prices, rose to 6.1 percent in March, the best performance since the government introduced them in 1997.

Still, elevated home-vacancy rates signal investors may not need the protection.

“This is another reason that the Fed should not worry about inflation, but rather concentrate on fighting deflation,” said LaVorgna. “Talk of reducing the balance sheet at this point is premature.”

To contact the reporter on this story: Matthew Benjamin in Washington at mbenjamin2@bloomberg.net

Last Updated: April 23, 2009 00:00 EDT