(Bloomberg News) For all the attention given to almost $4-a-gallon gas, the biggest threat to containing U.S. inflation may be the shift away from homeownership, which is pushing up the cost of leases across the nation's 38 million rented residences.
Shelter represents about 40 percent of the consumer price index excluding food and energy and accounted for almost one quarter of the 1.3 percentage point rise in April. That share has grown as falling home prices shake Americans' confidence in housing as an investment.
Federal Reserve Chairman Ben S. Bernanke and his colleagues say they will hold interest rates at record lows for an "extended period," based on an assessment that slack in the economy from 9 percent unemployment will help subdue core inflation and any threat of accelerating prices likely will be "transitory." Not everyone agrees with that judgment.
"They should have looked at rents," said Maury Harris, chief U.S. economist in New York at UBS Securities LLC, whose team at UBS was the most accurate inflation forecaster over 2009 and 2010, according to Bloomberg calculations. "They're putting too much weight on the 'slack is all that matters' theory. It matters but, for heaven's sake, it's not all that matters."
Housing has become "a contributor to inflation, and it continues to rise," agreed Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, with $22 billion in assets under management. That's partly why he's advising clients to look at "specifically, a heavier mix of equities, and maybe the use of TIPS to mitigate the effects inflation could have over 10 years or longer."
Investor Expectations
Investor expectations of rising prices in the next decade, as measured by the spread between Treasury Inflation Protected Securities and nominal bonds, have fallen to 2.28 percent from 2.66 percent on April 11, the year-to-date high.
"When you look at the longer-term portion of a bond portfolio, consider pretty carefully the ravaging effects that inflation could have," McCain said in an interview. He estimates that rents have accounted for about 1 percentage point of the last decade's 2.4 percentage point rise in prices and soon may revert to or overshoot this trend.
"The worse it gets for apartment rentals, the more you're going to see that number adding to the overall inflation rate," he said.
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