September 7, 2021

Will High U.S. Home Prices Put Upward Pressure on Inflation?

by Thomas Alonso.

There has been much comment about inflation’s recent rise and its drivers. Will the gain ebb as the outsized impact from base effects and current supply chain bottlenecks ease in 2022, or are more persistent price increases headed our way?

CPI inflation figures have continued to march higher, hitting a 10-year high of +5.3% YoY in July, the most recent data release from the U.S. Bureau of Labor Statistics.

Much of the increase has been driven by the strong increase in commodity prices, with the Thomson Reuters/CoreCommodity CRB Index up 38.4% through August 31, as demand from reopening economies and well-documented supply chain bottlenecks impacted prices.

This is well reflected in CPI data as shown below in Exhibit 1, which (from top to bottom) shows the YoY increase in the energy, gasoline and commodities, less food and energy, components of CPI.

Exhibit 1: CPI Energy, Gasoline and Commodities, Less Food & Energy, YoY Change

This increase has also been reflected in revenue and earnings growth expectations for the energy and materials sectors in the S&P 500. As shown below in Exhibit 2, reproduced from our weekly S&P 500 Earnings Scorecard (which can be found at ( along with other recent reports), those sectors have the highest expected revenue and EPS growth estimates for 2021Q3.

Exhibit 2: S&P 500 Sector YoY Earnings and Revenue Growth Estimates

Housing has also seen dramatic price increases but has received less attention relative to the impact on inflation. This is somewhat surprising as shelter costs, measured by Owner Equivalent Rent and Rent of Primary Residence combined, account for about 31% of the total CPI weight.

Both the S&P CoreLogic Case-Shiller U.S. National Home Price Index and the National Association of Realtors (NAR) median home price figures have reached record levels, exceeding peaks reached during the housing boom of the 2000s (Exhibit 3). Although NAR figures have retreated from their peaks, they remain elevated, up 17.8% YoY.

Exhibit 3: Case-Shiller U.S. National Home Price Index and the National Association of Realtors Median Price YoY Change

Despite the price gains for most of this year, CPI Owner Equivalent Rent and Rent of Primary Residence measures have only just turned up again, after declining for most of 2021.

This is a repeat of the pattern seen in prior housing cycles, with Case-Shiller leading the OER and rent figures by several months. In the 2000s, the YoY change in OER peaked in December 2006, just three months before Case-Shiller turned negative, and well after the peak in home price appreciation.

Rent expense in the CPI index continued to rise until March 2007. Neither of these figures turned negative until 2010, and then for only a few months. We see the same pattern repeat with the NAR House price data. (Exhibits 4 and 5)

Exhibit 4: S&P/Case-Shiller National Home Price Index vs. CPI Owner Equivalent Rent and Rent of Primary Residence YoY Change

Exhibit 5: National Association of Realtors Median Price vs. CPI Owner Equivalent Rent and Rent of Primary Residence YoY Change

If OER and Rent expense in the CPI measures were to return to their prior cycle highs, we estimate it could add 0.6% to current inflation figures, all else equal. Given the lag that these components typically have, we could see this impact in 2022 as other “transitory” inflation pressures fade, which could keep inflation figures higher than expected.

While forward inflation expectations are seemingly well anchored, with the 5-year, 5-year forward (a measure of expected inflation, on average, over the five-year period that begins five years from today) at ~2.2%, an unexpected increase in underlying inflation from past house price increases could come as a surprise to the market, and bears watching.

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