Wednesday, December 12, 2018

Housing: Part 337 - Shelter inflation

This isn't anything earth shattering, but as I was updating this month's CPI numbers, I realized that I had never attempted to quantify the portion of shelter inflation that has been directly attributable to the five "official" Closed Access cities.

The first graph here is just a comparison of various annual inflation rates:
  • Grey line: Core CPI excluding Shelther
  • Black line: Core CPI
  • Green line: Non-Closed Access Shelter Inflation
  • Blue line: US Shelter Inflation
  • Red line: Closed Access Shelter Inflation
The main point to gather here is that, except for the foreclosure crisis, for the past 20 years or so, Closed Access rent inflation is pretty consistently in the 4% to 5% range.  During the housing boom, homes needed to be built in other locations, and the pressure pushing households into those homes from the Closed Access cities was continued demand for Closed Access homes.  That kept Closed Access rent inflation high, and the housing boom was facilitating the movement out of the Closed Access cities to further accommodate that demand.

As I have pointed out before, the top of the "bubble", in 2005, was the only point in the past 20 years where both shelter inflation and non-shelter inflation were both at approximately the 2% inflation target.  That was actually the closest we have been to a neutral monetary policy and residential investment level both at the same time.  As shown here, the decline in rent inflation at that point was entirely from non-Closed Access areas.  Then, the Fed raised rates to cut down residential investment, and non-Closed Access rent inflation moved back up.

During the recovery, the limit to building has been due to mortgage suppression, so it is nationwide, so rent inflation has been high everywhere - nearly as high in non-Closed Access areas as in Closed Access.

The next graph is a stacked graph.  Looking at the first graph, the gray and black lines are the same - core CPI without shelter and with shelter.  This shows how much of the gap is caused by non-Closed Access rent (gray to green) and how much is due to Closed Access rent (green to black).  The last graph is the three measures stacked again, but in reverse order.  First, the portion of US core CPI inflation that is due to Closed Access rent (red), then the portion due to non-Closed Access rent (red to green), then the portion caused by all other core inflation (green to black).

PS: One oddity is that, for non-shelter core inflation, the recession and immediate post-recession years are the only time that the measure was persistently near the target.

PPS: To clarify the stacked graphs, if non-shelter core inflation is 2% and shelter inflation is also 2%, then shelter inflation is shown as having no effect on core inflation.  The graph is showing how much of the gap between non-shelter core inflation and total core inflation is due to shelter inflation.


  1. Great stuff.

    The big picture remains that nonshelter core inflation is below 1% and maybe even falling.

    Yet 99% of economists continually link labor costs and inflation and almost never link housing costs and inflation.