With rents continuing to rise, the Feds are considering downplaying how much effect they have on our measure of inflation.  Will core inflation eventually mean excluding Food, Energy and Housing?  What’s left to inflate?

If you’re worried about how inflation can impact you, consider one of the most beaten down asset classes, Real Estate.  Whether it be a single-family starter home or a multi-family income property, ask me how you can protect yourself from this risk.

Derek

By KELLY EVANS

Americans love affair with housing is over. But, ironically, deflation of the bubble risks fueling consumer-price inflation.Shelter costs account for 32% of the overall consumer-price index and about 40% of core CPI, which excludes volatile food and energy. The tightening rental market, as fewer Americans opt to buy homes, is a key reason why core inflation stopped declining last year and is moving higher.But there is a debate over how shelter costs are calculated and whether rents carry too much weight. The biggest component of shelter is so-called “owners equivalent rent,” which is an approximation of what homeowners would pay to rent their property. The measure is calculated using rental increases and doesnt factor in changes in house prices or mortgage payments, even though most people in the U.S. own their homes. Europes official inflation measure uses just rents. The U.K.s approach blends rents with other factors such as mortgage rates.Questions are likely to grow as rising rents push up core U.S. inflation this year, adding to pressure on the Federal Reserve to raise interest rates. Barclays Capital expects year-on-year growth in the core CPI will hit 1.8% by December from 1.1% in February. OER is expected to jump to 1.2% year-on-year in December from 0.6% in February, despite a sluggish housing market.Some suggest alternative inflation measures. A “supercore” alternative excludes not just food and energy but shelter, too, to gauge underlying trends. Yet this would hardly sit well with most Americans, who already feel the Fed is ignoring the run-up in food and energy costs and know housing is a huge cost.The Feds own preferred gauge is the price index for personal consumption expenditures, or PCE, which is based on actual monthly outlays instead of the CPIs household survey. The PCE gives a higher weight to medical costs than the CPI and a lower weight to housing—15% of headline PCE and 17.5% of core. It is also why the core PCE, as of February, was up only 0.9% year-on-year.For those who take issue with excluding food and energy, the Cleveland Fed has a “trimmed mean” CPI that strips out the 8% of items with the largest price increases and the 8% with the biggest declines. It rose 1.2% year-on-year in February. There is also a median CPI, showing the price change of the item whose monthly move falls smack in the middle of the pack—up 1% as of February.The boost to inflation this year may be partly due to a quirk of the housing market, but the upward pressure will nevertheless be difficult for the Fed to ignore.

via Housing Bubble Continues to Haunt Fed – WSJ.com.