Surging homeowner insurance and other homeowner costs fuel OER CPI, which is now hotter than rent CPI.
By Wolf Richter for WOLF STREET.
On a month-to-month basis, the “core” Consumer Price Index – which excludes the volatile food and energy components – rose by 0.31% (+3.8% annualized) in September from August, the third acceleration in a row, and the biggest increase since March, driven by suddenly rising prices of used vehicles, in what is a sharp flip from the steep plunges before, and stubbornly high inflation in services (blue line in the chart below).
The 3-month average “core CPI” rose by 3.1% annualized, the second month of acceleration in a row as the low reading in June has now fallen out of the 3-month average (not shown in the chart below).
The 6-month average – which irons out most of the month-to-month squiggles – eased to +2.6% (from +2.7% in the prior month) as it still includes the low reading in June (red):
Year-over-year, in summary:
- Core CPI accelerated for the third month in a row to +3.3% (red in the chart below).
- Core Services CPI decelerated a hair to +4.8% (blue).
- Overall CPI, driven down by plunging gasoline prices, decelerated to +2.4% (yellow)
“Core services” CPI.
Core services CPI decelerated to a still high +4.4% annualized in September from August, compared to +5.0% in the prior month (blue line in the chart below).
The 3-month core services CPI, which no longer includes the very low reading in June, accelerated to 4.4% (not shown in the chart).
The 6-month core services CPI, which still includes the low reading in June, decelerated to 3.7% annualized, the smallest increase since January 2022 (red).
The housing components of core services.
Rent of Primary Residence CPI decelerated to +3.4% annualized in September from August. It has been zigzagging up and down in the same range roughly all year (blue).
The 3-month rate accelerated a hair to +4.63% (from 4.56% in the prior month). After cooling a lot in 2023, rent inflation hasn’t cooled much this year.
Rent CPI accounts for 7.7% of overall CPI. It is based on rents that tenants actually paid, not on asking rents of advertised vacant units for rent. The survey follows the same large group of rental houses and apartments over time and tracks the rents that the current tenants, who come and go, paid in rent for these units.
The Owners’ Equivalent of Rent CPI has also been zigzagging up and down all year. In September, it decelerated from August to +4.1%, after two months of sharp acceleration (blue).
The three-month OER CPI accelerated to 4.9% annualized, the second month of acceleration in a row (red).
OER CPI indirectly reflects the now soaring day-to-day expenses of homeownership: insurance, HOA fees, maintenance, and property taxes.
It accounts for 26.9% of overall CPI. It estimates inflation of “shelter” as a service for homeowners – as a stand-in for the services that homeowners pay for, such as interest, homeowner’s insurance, HOA fees, maintenance, and property taxes. It is based on what a large group of homeowners estimates their home would rent for, with assumption that a homeowner would want to recoup their cost increases by raising the rent.
Homeownership expenses push up OER: OER indirectly covers the expenses of insurance, maintenance, HOA fees, and property taxes, whose now surging costs could continue to fuel OER, and could see to it that it continues to run hotter than rent CPI.
Year-over-year, OER v. Rent CPI. OER rose by 5.3%, the third month in a row of rising at this pace, having broken the trend of year-over-year declines (red line). But the CPI for rent decelerated to 4.8% (blue).
That OER runs hotter than rent is unusual. It reflects perhaps the reality that homeownership is now substantially more expensive on a month-to-month basis in the US overall than renting an equivalent home, and that these expenses (except mortgage rates) continue to surge far faster than rents.
“Asking rents…” The Zillow Observed Rent Index (ZORI) and other private-sector rent indices track “asking rents,” which are advertised rents of vacant units on the market for rent. Because rentals don’t turn over that much, the ZORI’s spike in 2021 through mid-2022 never fully translated into the CPI indices because not many people actually ended up paying those high asking rents.
For August, the ZORI rose by 0.22% month-to-month and by 3.4% year-over-year. Zillow has not yet released the ZORI for September.
The chart shows the CPI Rent of Primary Residence (blue, left scale) as index value, not percentage change; and the ZORI in dollars (red, right scale). The left and right axes are set so that they both increase each by 55% from January 2017. The ZORI was up by 52% from January 2017, and the CPI Rent was up by 40% over the same period.
Rent inflation vs. home-price inflation: The red line in the chart below represents the CPI for Rent of Primary Residence as index value. The purple line represents Zillow’s “raw” Home Value Index for the US [this is also the data set we use for our Most Splendid Housing Bubbles in America series]. Both indexes are set to 100 for January 2000:
Motor-vehicle maintenance & repair inflation spiked by 12.1% annualized in September from August (+0.96% not annualized), after months of deceleration. This pushed the year-over-year increase to 4.9%, the highest since June.
Since January 2020, it has spiked by 37% as labor costs of auto-repair technicians have surged, and as prices of replacement parts have surged.
Motor vehicle insurance inflation spiked by 15.2% annualized in September from August (+1.2% not annualized), and by 16.3% year-over-year.
Since 2022, it has exploded by 51% because motor vehicle repair costs surged, and because used-vehicle prices (replacement values) had exploded in 2021 and 2022. But then it continued to surge, even as used vehicle prices have dropped, because auto insurers fattened up their profit margins. For example, GEICO, Buffett’s Berkshire Hathaway’s auto insurance unit, reported big increases in premiums despite reduced costs of claims that caused underwriting profits to more than triple!
Food away from Home CPI – often called food services – includes full-service and limited-service meals and snacks served away from home, food at cafeterias in schools and work sites, food served at stalls, etc.
- In September from August annualized: +4.1%, an acceleration
- Year-over-year: +3.9%.
- Since January 2020: +28%.
Core services CPI overall has risen by 23% since January 2020.
| Major Services ex. Energy Services | Weight in CPI | MoM | YoY |
| Core Services | 65% | 0.4% | 4.9% |
| Owner’s equivalent of rent | 26.9% | 0.3% | 5.2% |
| Rent of primary residence | 7.7% | 0.3% | 4.8% |
| Medical care services & insurance | 6.5% | 0.7% | 3.6% |
| Food services (food away from home) | 5.4% | 0.3% | 3.9% |
| Education and communication services | 5.0% | 0.1% | 2.3% |
| Motor vehicle insurance | 3.0% | 1.2% | 16.3% |
| Admission, movies, concerts, sports events, club memberships | 1.8% | -0.7% | 2.1% |
| Other personal services (dry-cleaning, haircuts, legal services…) | 1.5% | 0.1% | 4.1% |
| Lodging away from home, incl Hotels, motels | 1.5% | -1.9% | -2.8% |
| Motor vehicle maintenance & repair | 1.2% | 1.0% | 4.9% |
| Public transportation (airline fares, etc.) | 1.0% | 2.4% | 0.6% |
| Water, sewer, trash collection services | 1.1% | 0.7% | 4.8% |
| Video and audio services, cable, streaming | 0.9% | 0.0% | 1.8% |
| Pet services, including veterinary | 0.4% | -0.3% | 5.6% |
| Tenants’ & Household insurance | 0.4% | -0.5% | 2.2% |
| Car and truck rental | 0.1% | 1.2% | -6.8% |
| Postage & delivery services | 0.1% | -0.3% | 5.2% |
Durable goods.
New and used vehicles dominate. Other durable goods include information technology products (computers, smartphones, home network equipment, etc.), appliances, furniture, fixtures, etc. All categories have been experiencing price declines starting in late 2022, following the price spike during the pandemic. But the sharp month-to-month price declines in motor vehicles ended in September.
Used vehicle CPI flipped. In September, used vehicle prices did a massive U-turn, to an increase of 3.8% annualized (+0.31% not annualized), seasonally adjusted, from a series of month-to-month plunges — deep in the double digits (annualized) in 5 of the prior 6 months that added up to a historic plunge off an even more historic spike.
The plunge of used vehicle prices since mid-2022 from the crazy spike had been a powerful contributor to the sharp cooling of core CPI. But it has now ended. And this strong tailwind for cooling inflation has turned into a mild headwind.
We’ve been expecting this flip because wholesale prices – what dealers pay to replenish their inventories – flipped three months ago [we discussed this all along the way, most recently here: More Evidence this May Be the End of the Historic Plunge of Used Vehicle Prices that Had Pushed Down CPI].
This month-to-month rise reduced the year-over-year drop by half, to -5.1% (from -10% in the prior three months).
New vehicles CPI rose 0.2% (+1.9% annualized) in September from August, the second month in a row of small increases, after months of small declines. Year-over-year, the index fell by 1.3%.
Prices of new vehicles have been sticky after the blistering spike from early 2021 into early 2023 – unlike used vehicle prices – and have only given up a little ground since the peak, despite the glut of new vehicles on many lots, and amid calls for big incentives and discounts to move the vehicles. The index is up 19% from January 2020:
In the years before the pandemic, the new vehicle CPI zigzagged along a flat line, though vehicles were getting more expensive. This is the effect of “hedonic quality adjustments” applied to the CPIs for new and used vehicles and some other products (see our explanation of hedonic quality adjustments in the CPI).
| Major durable goods categories | MoM | YoY |
| New vehicles | +0.2% | -1.3% |
| Used vehicles | +0.3% | -5.1% |
| Information technology (computers, smartphones, etc.) | -1.2% | -7.9% |
| Sporting goods (bicycles, equipment, etc.) | -0.3% | -2.3% |
| Household furnishings (furniture, appliances, floor coverings, tools) | 0.0% | -2.2% |
Food Inflation.
Inflation of “Food at home” – food purchased at stores and markets and eaten off premises – flattened out this year at a very high plateau, but in September rose again. The CPI for food at home is up by 26% since January 2020.
| MoM | YoY | |
| Food at home | 0.4% | 1.3% |
| Cereals, breads, bakery products | 0.3% | 0.1% |
| Beef and veal | 0.6% | 4.2% |
| Pork | 0.5% | 1.5% |
| Poultry | -0.1% | 0.5% |
| Fish and seafood | -0.2% | -1.3% |
| Eggs | 8.4% | 39.6% |
| Dairy and related products | 0.1% | 0.5% |
| Fresh fruits | 2.2% | 1.6% |
| Fresh vegetables | 0.0% | 0.2% |
| Juices and nonalcoholic drinks | -0.3% | 1.7% |
| Coffee, tea, etc. | 0.8% | 0.2% |
| Fats and oils | 1.1% | 4.1% |
| Baby food & formula | 1.2% | 2.6% |
| Alcoholic beverages at home | 0.1% | 1.6% |
Apparel and footwear.
Apparel and footwear are components of nondurable goods, along with food, energy products, household supplies, and other stuff.
Month-to-month, the CPI for apparel and footwear spiked by 1.8% (+15% annualized). This increased the year-over-year gain to 1.1% from a flat reading in the prior month.
The trend of deflation in the years before the pandemic seems to have ended:
Energy.
| CPI for Energy, by Category | MoM | YoY |
| Overall Energy CPI | -1.9% | -6.9% |
| Gasoline | -4.1% | -15.3% |
| Electricity service | 0.7% | 3.7% |
| Utility natural gas to home | 0.7% | 2.0% |
| Heating oil, propane, kerosene, firewood | -3.1% | -13.0% |
The CPI for energy covers energy products and services that consumers buy and pay for directly:
Gasoline prices, which account for about half of the energy price index, plunged in September from August, both seasonally adjusted (red) and not seasonally adjusted (blue). This was the big factor in driving down overall CPI:
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As you called it Wolf. Inflati5n ain’t going away
Wolf did call it. He should take Powell’s place.
oh…not so fast…MSM already gave the greenlight for another rate cut and mission on the way to accomplishment…it’s so predictable it’s not even funny…..
”
MONEYWATCH
U.S. inflation continued to cool in September, latest CPI data shows “
WSJ:
“Inflation Extends Bumpy Decline with Mixed Readings.”
On a month-to-month basis, the “core” Consumer Price Index – which excludes the volatile food and energy components – rose by 0.31% (+3.8% annualized) in September from August, the third acceleration in a row, and the biggest increase since March, driven by suddenly rising prices of used vehicles, in what is a sharp flip from the steep plunges before, and stubbornly high inflation in services (blue line in the chart below).
Says it all. Inflation, which is an insidious malady for an economy too have caught, is still alive.
The Fed is unlikely to cut at the November meeting of the FOMC and the setting of the FFR. IMO, the market for risk is at an all time low.
The social security increase for next year was released today but nobody’s reporting it, 2.5%. I had to look it up.
I’ve been seeing the news reports on it for months now.
What will you all spend your $48 on?
5 Super Value Meals?
Or like 1 tank of gas?
Everyone reported it. Everywhere I looked I saw it. It was truly everywhere, including on the front page of the WSJ, left column near the top.
Overall CPI inflation has been pushed down by the plunge in energy prices, which has been going on all year, which you would know if you ever read my CPI articles.
I think Paul Volcker showed Fed chairmen how to whip inflation many years ago. This fed chairman hasn’t been as focused as Paul was, and I know Wolf has been trying to give reasons why this gradual job was as good as Volcker’s but we’ve had many instances since 1980 of fed funds rates at or near where they are now without really significant inflation. If we accept 3.3%, we’ll eventually end up in the Argentina boat.
Time to accept that he may have loosened too soon, and quit being so politically influenced. Your job is to maintain low inflation…for years 2% was the standard, so don’t stop until you get back to 2%.
Jerome Powell is reminiscent of Federal Reserve Chairman Arthur Burns; can’t figure out where inflation came from as Powell apparently doesn’t own a mirror and can’t tell the difference between descending to 2% skimming rate versus ascending to “the sky’s the limit.”
Yeah inflation took off at sea level , went to 30,000 feet. Then capt powell landed in Denver. Said “we’re here! Look we’ve landed safely!”
but now we’re Rocky Mountain high. ⬆️
…and the bums trying to bum a cigarette are going to have a harder time of it with them up to 59 cents apiece.
Biden’s Inflation Production Act is pumping hundreds of millions of dollars into the economy. This is a factor that increases inflation, among many other factors under “government spending” that causes inflation. Trump will be saddled with this in the next administration.
Spending is the number one problem.
Even the ss increase was above 2 percent above the Core Fed Target.
I work with a lot of young people and feel terrible for them. Most of them came to the conclusion that the American dream and the system failed them. They think they’ll never own a house or live the same quality of life as the previous generations. I can’t say they’re wrong.
Inflation killed this country in two short years.
When I was one of the young people, inflation was 15% and unemployment was 8-10%, and I tried to find a job with a fresh graduate degree and no place to go. It sucked. “Quality of life” wasn’t even on my mind. Survival was. It was a terrible time to get out of school. My entire age group had the same issue. Some were luckier than others. In the end, most of them struggled for a while and got it worked out.
Now unemployment is 4.1%, there are lots of good jobs — though maybe they don’t chase down candidates like they used to a couple of years ago — and inflation has calmed down a lot. Inflation is now lower than it was for a big part of my life. Lots of young people make huge astonishing amounts of money, others struggle. Sure, not everyone gets the same.
No one ever told us that it would be easy to start out. The American Dream back then was to start with nothing, work very hard for a long time, and finally get to a place where you’re comfortable. That was the American Dream back then.
Failure, I was born in 1997, and I approve this message.
Myself and most of my peers that I’ve talked to wouldn’t dream of joining the military and fighting for this country. Why fight for a nation that seems to hate us?
That energy graph almost mirrors the oil graph.
Here in NC the power companies burn A lot of natural gas. I guess it comes from a pipeline somewhere? From like Texas or Canada maybe.
Also some solar and nuclear. But I dunno how much the solar arrays help. Hopefully some! Although I doubt I see any kind of discount on the bills which have almost doubled in the last year.
Natural gas is the cleanest burning hydrocarbon in existence, and we have a virtually unlimited supply of it in the western hemisphere.
Abundant energy is keeping overall inflation from being much higher.
Where I live in NYC every used car dealer/used car lot is overstocked, and I mean there is literally no place to put any more cars, so it looks to me like a humongous used car glut is coming, if it is not here already.
I am watching the stock Carvana (CVNA) it has a market cap of almost $23 Billion and it has done nothing but lose money since its IPO. They have $5 billion in debt that they will NEVER be able to repay. 14% of the float is short, I don’t know how this stock stays up, it is a train wreck waiting to happen.
I am still keeping my prediction that the S&P is a LOCK to see 4500 again at some point.
Feels like when it comes to cars and houses, there’s still a huge disconnect between dealers/sellers who are delusional about what they want vs what’s the reality…
This is a more extreme end of a comparison, case in point. Brand new Z06 one dealer advertised $10K off MSRP (which is not something one can dream of back in the insane time) to SoCal dealers still want $5K markup over MSRP. You see the same thing with houses for sale all over the place.
As a locomotive engineer — looking out four months, I see risk of a collision between sticky inflation, overly aggressive Fed tinkering, higher yields, lower equity earnings that spill into lower P/e ranges, increased volatility, decline in gold and continual data ambiguity revisions that slow the GDP train down, as it descends from the mountain pass.
The engine isn’t going to be burning the same level of fuel in regard to the “normal” level of the last four years.
I think there’s also going to be a deficit premium added into future trading — there’s no free lunch ahead.
Inflation, supposed to have tapered off by now, remains with us. This situation is complicated by the globalized economy we live in, with many players affecting the inflation environment. Still, the core player remains the United States, and the U.S. can be said to be the “home of inflation.”
“That OER runs hotter than rent is unusual.”
Note that the last time OER > Rent CPI was right before inflation took off.
Wolf, minor typo: above your Core services CPI overall graph, surge should be surged.
Incredibly valuable analysis. Thank you.
Inflation whack a mole… Shelter cools but almost everything else pops🤷 25bp cuts the next two meetings then a long pause coming?
Time will tell
Instead of just the year-over-year inflation comparisons that we are given, I’d like to see the “five year over five year” comparisons. They don’t show us that. It would probably scare the crap out of everyone. If three percent/year is the new normal that is a tragedy. I don’t believe the Fed genuinely cares about keeping prices down.
RTGDFA
“I’d like to see the “five year over five year” comparisons.”
???
I just switched my diet to a vegetarian “South India” diet from my Mediteranian diet. Saving a lot on food. Inflation in food is no longer a problem for me. The grocery stores can go pound sand with their overpriced junk/processed food.