How Housing's Surge Is Suppressing CPI

Core consumer prices were flat in April compared with March, the first unchanged reading since November 2003 and two-tenths of a percentage point lower than expected. April marked only the fifth time in 22 years that the core prices were unchanged. (Prices haven't fallen since December 1982.) April's benign reading followed an unusually large gain of 0.4% in March, which was the largest gain since August 2002.

In light of the unusually large gain posted in March and the equally unusually benign reading in April, it is probably best to combine the two months, as both are outliers. Core consumer prices, therefore, appear to be trending with gains of about 0.2% per month or perhaps more in light of the 2.7% annualized gain seen so far this year.

A Flip-Flop From March

April's benign reading partly reflects a flip-flop of price increases seen in March. For example, lodging away from the home rose an unusually large 3.9% in March but fell 1.2% in April. Gains in this category have averaged 0.6% per month in the past year. Apparel prices rose 0.8% in March (prices tend to be flat or lower) but fell 0.6% in April. Medical costs rose just 0.2% after rising 0.5% in March (gains tend to average about 0.4% per month).

The Federal Reserve is likely to analyze the April CPI in the context of the March CPI and hence draw no inferences from each individual month. The PCE deflator remains the key inflation gauge to watch. Trends in labor costs also will weigh heavily at the Fed.

Housing Market Soars, Knocking Rents Lower

Importantly, the housing component continues to weigh on consumer prices. Owners' equivalent rent (OER), which measures the amount of money that homeowners believe they could get for their homes if they rented them, accounts for 23% of the overall CPI and about 30% of core prices. OER rose just 0.1% in April, half its usual gain.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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