Overstated Shelter Costs Pump Up Reported Inflation, Says Sage

Housing costs make up about one-quarter of the Consumer Price Index, and the U.S. Bureau of Labor Statistics, which issues the inflation gauge, blamed shelter for the December blip sending the CPI upward.

That’s nonsense, according to Barry Ritholtz, noted economic commentator, in a blog post. He joined a long line of critics of how the government agency calculates shelter inflation. “In the real world, shelter measures were flat or negative,” wrote the co-founder, chairman and CIO of Ritholtz Wealth Management LLC.

Not in the BLS world. The CPI rose 0.3% in December and 3.4% from one year prior, exceeding estimates of 0.2% and 3.2%, respectively. “The index for shelter continued to rise in December, contributing over half of the monthly all-items increase,” the BLS report read. By its measure, shelter was up 6.2% year over year in December, and 0.5% from the previous month.

The BLS tracks shelter via a metric called owners’ equivalent rent, which is based on a survey asking homeowners—both of single-family houses and apartments—how much they would pay to rent out their abodes. The longstanding criticism of this approach is that these respondents are overestimating what they could lease the places for.

Ritholtz used the Apartment List National Rent Report as his proxy for rental costs. This report “showed that the rental market ended 2023 with a fifth straight month of negative rent growth nationwide, [and] median rent fell by 0.8% in December—even as the lagged BLS measure showed a rise,” he wrote. Here comparisons get tricky, yet it’s worth examining the components of this question.

Ritholtz quoted the Apartment List: “Apartments across the country are slightly cheaper today than they were one year ago. This stands in sharp contrast to the prevailing conditions of 2021 and 2022.” Actually, the same could be said for home buying, at least in some places: Prices for single-family homes had dropped in 25 of the 100 largest U.S. cities over the 12 months through November, a study by research firm Point2 found. And condominiums are more closely linked to rental apartments.

Indeed, houses are not the same as rental apartments, which many think less expensive due to lower upkeep costs and no financing outlays. But in two-thirds of housing markets, buying is more affordable than renting, per ATTOM Data Solutions. Still, one can argue that there is a rough equivalency, in that 36% of all houses are rentals.

If the BLS adopted Ritholtz’s take on shelter calculation—the agency did not respond to a request for comment—then maybe that lower inflation target that the Federal Reserve seeks (2%) would be reached in short order.