CPI shelter index showed 'mysterious' rise: Economist

let's hone in on the shelter component of August CPI data the index Rising half of a percent the Bureau of Labor Statistics attributing it as the main factor in the items that we did see increase joining us now we want to bring in Brian Rose he's UBS Global wealth management senior us Economist and Brian let's just start there when it comes to the stickiness of housing how long it's going to be an issue how big of a drag this will likely be in reports to come what do you think yeah this is actually quite mysterious uh how things like o are accelerating now so the actual data on leases you we have this high frequency data showing when people are signing new leases what their rents are that um peaked out you know almost two years ago and uh to see the Oar accelerating at this point is yeah very strange very difficult to explain there's a lot of nuances and unusual things in this data it's very noisy uh and there's also uh this question of when the pandemic hit and we had that big runup in rents the CPI seemed to lag behind the reality and then there's this catchup period and it looked like that catch-up period was over that we had caught up but you see the data out this morning it seems like okay maybe we haven't fully caught up to the sort of understatement that we had uh ear in the pandemic so yeah this has proven to be unusually difficult to predict and um you know overall it you know we know from the lease data that this has to slow at some point it will slow because the rents aren't Rising very quickly but exactly when this will happen uh yeah is is hard to say yeah yeah and that's exactly what I was about to ask you Brian like how much of a lag are we expecting between it actually showing up in this data and then for the FED to to recognize that reality of of the slowing and at least perhaps shelter not being the main factor that's contributing to the all items index yeah so already uh the the lag between the reality and the CPI data is much longer than we've seen in the past so you're normally expect it to lag by around 12 months but it's lagging in this case by more than 18 months and uh again just there's this question of the catch up to the rent increases early in the pandemic and whether that process has has finished but one important point in terms of the FED is there's a real question as to how much the FED should worry about this because you know Oar isn't actually paid right this is sort of a theoretical cost but it's not the actual cost so you doesn't make sense to leave rates High because of this sort of theoretical cost of you know how much would it be if you were paying yourself rent for the house that you that you own and uh I think to some extent you have to look through this and the FED has talked about this you know uh we know the data is lagging we know the data on new rental leases isn't isn't so bad and if you you know look outside a shelter right the inflation rate headline inflation 3.2 but without shelter it's only 1.1% year over year so there's a real question as to you how much growth are we willing to sacrifice how much pain are we willing to accept in the labor market because of uh you know this this very technical increase in uh things like Oar Brian while we have you I want to take you to a quote that Dr sahap the chief Economist over at core logic uh in their own uh annual us home price growth um study had pointed out for their summer uh release here and saying that summer brought notable cooling to the housing market she also mentioned that housing demand continued to buckle under the pressure of high mortgage rates unaffordable home prices leading to a considerable slowing of home price gains during the summer to what extent do you believe we need to see the FED cut interest rates in order for mortgage rates to come down but not so much so that it would impact on the other side housing prices to see even more bidding into them which would keep the pricing uh sustained at this level it would seem at least in theory yeah so uh I mean it is true that the combination of very high housing prices and high mortgage rates is making the housing extremely unaffordable so we haven't seen anything like this in since the early 1980s when the FED fund rate was up near 20% uh very very unaffordable and um you know in in the end ultimately we need more Supply so you know you can talk about cutting rates or whatever but we have a fundamental housing shortage we just haven't built very much housing since the housing bubble burst and we had the global financial crisis we haven't built enough and uh you know we need to increase the the supply you hear at least uh vice president Harris talking a lot about this issue issue you know she has plans to try to increase housing Supply and that is really the the solution you know you can cut interest rates to to help mortgage payments but you know rents and housing in general will remain unaffordable until we increase the the supply there's just too many people and not enough housing to to shelter them all so Brian I guess as we close this out and it brings me back to your point before just about the debate how closely the FED should really watch Oar and ultimately what that means just given the fact that it is an estimation and the fact that shelter was the Big Driver in this month's uh rise that we did see at least the the higher than insed corporate but when it comes to what the FED should do at the next meeting there is a school of thought that if they don't go 50 basis points it could risk hurting the economy more in the long run do do you share that view at all and why or why not so this is yeah very difficult situation for the FED very very difficult to understand exactly what's going on in the economy because all the data that we rely on has become less reliable since the the pandemic so more noise more revisions to the data uh more discrepancies between two estimates that should be the same in theory but are very different when when you uh see them so now the fed's got the you know a difficult situation to uh to deal with but uh I would say that the main focus at this point is on the labor market so the inflation data itself doesn't add urgency to rate Cuts but what add urgency is the you know deterioration in the labor market especially layoffs so right now what you see is hiring has slowed new entrance are struggling to find a job but the layoffs remain low you can see initial jobless claims are still low but if you start seeing those layoffs taking off the FED will get very concerned that it's behind the curve that would add urgency that would you know make the FED cut rates more uh aggressively without the without weaker labor data I think the FED would prefer to cut 25 bases points at a time great to have you here with us this morning Brian Rose of UBS Global wealth management appreciate the time and insights thanks so much thanks very much