Wondering why inflation figures are so tame when real estate prices are soaring? There is a simple explanation: the Consumer Price Index factors in rising rents, not rising home prices.
The CPI for July was released today and rose 0.5% -- just 0.1% (for the third month in a row) when you factor out energy and food prices. But 40% of the core inflation index is tied to rents. The "owners equivalent rent" index (derived from how much homeowners say they could charge in rent), rose by just 0.2%. (There was also a 0.9% drop in apparel prices, a 1% drop in new car prices).
"There are powerful forces holding the inflation rate down going forward, most importantly the weakness in the rental housing market," commented Dean Baker, co-director of the Center for Economic and Policy Research in Washington, in a research note today.
It's good for the economy and the stock market that inflation remains low. But are we really getting a true reading on inflation when home price appreciation isn't added into the mix? I think not.