Housing Glut Pushes Rental Inflation to Record Lows

The overall CPI was unchanged in July while the core index rose by 0.1 percent.  Over the last three months the overall index has increased at a 3.4 percent annual rate, driven by sharply higher energy prices in June.  It is down by 2.1 percent over the last year.  The core index has increased at a 1.7 percent annual rate over the last quarter, virtually the same as its 1.5 percent rate of increase over the last year.

One of the main factors keeping inflation in check is the unprecedented glut in housing.  The overall vacancy rate was at a record level in the second quarter, with a sharp increase in rental vacancies more than offsetting a modest decline in the vacancy rate for ownership units.  This glut is putting downward pressure on rents.

Both the rent proper and the owners’ equivalent rent (OER) components of the CPI were unchanged in July.  Over the last quarter, the rent proper component has risen at just a 0.6 percent annual rate, while the OER component has risen at a 0.7 percent annual rate.  Both are the lowest rates since these series have been kept.  These components together account for more than 30 percent of the overall CPI and almost 40 percent of the core index.  They will dampen any inflationary pressures that develop elsewhere for the foreseeable future.

The index for lodging away from home fell by 2.1 percent in July.  The monthly data from this index is highly erratic, but it has been falling sharply due to the enormous overbuilding in the hotel sector over the last year.  This component is down by 8.9 percent over the last year.

The inflation picture without shelter would look very different right now.  Over the last three months, the overall CPI excluding shelter rose at a 5.1 percent annual rate.  The annual rate of inflation in the core CPI excluding shelter has been 2.9 percent over the last quarter.

This inflation has come in part from the usual sources.  Health care costs have risen at a 2.8 percent annual rate over the quarter while education costs have risen at a 6.0 percent rate.  However, there have also been some unusual factors pushing inflation higher during this period.  The apparel index has risen at a 4.5 percent annual rate while the vehicle index has risen at a 4.9 percent rate.  The index for other goods and services has risen at a 3.3 percent rate.

The rise in the apparel index is likely an aberration.  It had fallen sharply in the second half of last year and the recent rise is mostly just reversing that decline.  The rise in car prices may be more enduring.  The main point of the cutback in dealerships by the Big Three was to increase market power and thereby raise prices.  If they are successful, we may be seeing somewhat higher auto prices going forward.

The rise in the other goods and services component was driven by an 11.5 percent rate of increase in tobacco prices.  This is primarily the result of higher cigarette taxes as state and local governments look to make up revenue shortfalls.

The July producer price indexes will be released next week, but the data available from the import-export prices indexes provide little evidence of any inflationary pressure.  Non-fuel import prices fell by 0.1 percent in July and have risen at just a 0.8 percent annual rate over the last quarter.  Import prices of non-auto consumer goods fell by 0.4 percent in July and are down by 1.2 percent over the last year.  Auto import prices rose by 0.1 percent, but are flat over the last year.  Non-agricultural export prices rose by 0.2 percent in July, but are down by 6.5 percent over the last year.

While there will be some pockets of inflation in the economy in the near-term future, these will be largely offset by the huge glut of housing and hotel rooms, which will keep the overall and core inflation indexes well under control.  Until a falling dollar starts to raise import prices, there will be no substantial inflation in sight.

Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C.  This article was first published by CEPR on 14 August 2009 under a Creative Commons license. This year is the tenth anniversary of CEPR.  To donate to CEPR so it can continue its good work, click here.