The Rent is Too Damn -- Part 2

Better than Return to Blue Lagoon -- but not by much

Summary

• Inflation will retreat even if gasoline prices rise due to the relatively small weight of gasoline in the index. The price of gasoline would have to more than double, as it did in 2021-22, to offset the impact of the declining rent of shelter.

• Both supply and demand factors have weakened more than expected from last week’s note, reducing the forecast for the end of the year 2023's inflation rate from 2.08% to 1.74%. This number might be lower due to impending decreases in the cost of shelter.

• The large backlog of multifamily properties and increasing rental vacancies will lead to a fall in rents by the end of the year.

Top Comment

Dr. Dodjie noted: I come for the knowledge. I stay for the sarcasm.

MWG: If there is sarcasm, it is unintentional /s

The Main Event

When we last left our intrepid adventurer, he was making the foolish argument that inflation would likely retreat in defiance of the current mantra that “easy compares” are over and CPI will likely prove sticky into year-end. The dumbest man alive. In the last month, oil prices are up 20% (about 12% using the 1yr strip), and gasoline prices are rising at retail with a West Coast refinery outage driving gasoline inventory lower faster than seasonal. This compares to the back half 2022, where gasoline prices fell 37%. Mon Dieu, you idiot. This is so obvious.

Except it’s not at all. Does anyone want to guess the gasoline weight in the CPI? Buehler? 3.5%. Why was it such a significant contributor to CPI in 2021-22? Because it tripled! When 3.5% rises by 200%, it adds a lot to CPI (700bps, to be precise). When 3.5% increases by 20%, it’s (literally) an order of magnitude less important. 70bps max if the oil bulls are correct. And to be clear, I’m actually bullish oil into the back half of the year. But this is not the inflation story you might expect.