CPI Shelter Vs. All-Transactions House Price Index

by: Pat Stout

Summary

The CPI shelter components is at a record high.

The All-Transactions Housing Price Index is below the December 2007 level.

Case-Shiller index is below the December 2007 level.

The chart below shows the All-Transactions Housing Price Index versus the CPI owners' equivalent rent and rent of primary residence. The CPI housing figures did not decline when the All-Transactions House Price Index declined from 2007 to 2012. Therefore, the CPI might be overstated.

The indexes were set to a 100 base for December 2007. The CPI indexes have set a new high while the All-Transactions Housing Price Index has not rebounded to the 2007 level.

The chart below uses the Case-Shiller index, along with the All-Transactions House Price Index and the CPI rent of primary residence. The Case-Shiller index tracks the All-Transactions House Price Index and suggests that the CPI housing component might be overstated.

Why It Is Important

If the All-Transactions Housing Price Index, or the Case-Shiller index, is more accurate, then the CPI housing component could be overstated. If the CPI is overstated, then CPI could be closer to deflation territory than the Federal Reserve might believe. Should the CPI be near or in deflationary territory, then the FOMC by increasing short-term interest rates might spark a deflationary recession.

Shelter is 32.711% of the CPI index. All items less shelter fell 1.2% during the year ended July 2015. That is deflation ex-shelter. Moreover, if shelter is declining, then the CPI is in deflation. A flat CPI shelter component would have pushed the total CPI to -0.8% from 0.2% for the year ended July 2015.

Thoughts On The Dollar Index

Do not expect the Dollar Index to gain strength from current levels. The chart below suggests that historically when the yearly gain for the Dollar Index gains 20%, the index tends to decline.

Bottom Line

If the CPI is overstated, then the Federal Reserve might delay increasing the federal fund rate target. This is expected to pressure the Dollar Index.

What do you think?

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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.