Based on the individual price detail from the CPI, the one typically serious bean count I have seen for the core PCE deflator implies an advance of about 35 basis points. That would map to a 28 basis point rise of the Observed Rent Core Market Price Only PCE Deflator, which I take to be the single best measure of underlying goods and services price inflation in the current environment. As the right panel of the chart below shows, that would allow the 3-month rate of inflation there to tick down to 3.2%, near the low for this episode. And the 12-month rate would fall from 4.3% to 4.1%. Accordingly, there is no need to adjust my earlier take based on the CPI in response to this core PCE deflator bean count. As mentioned, this supports the skip, although the easy part of the underlying disinflation would now seem to be in.
I would like to conclude here with an aside on observed or marginal rents. The BLS has updated their new tenant repeat rent index (NTRR) through the first quarter. It suggests that the 2-quarter rate of change of marginal rents has slipped to just over negative 10% (ar). It also suggests that the gap between marginal rents and average rents in level terms has now fully closed, which would mean that average rent growth should slip immediately to about 25 bps a month. I have seen people who should know better than to take current vintage estimates of the NTRR at face value.
The BLS’s own research shows the real time estimates of the NTRR are extremely unreliable. Indeed, the reason the original research on the NTRR took such pains to investigate which private sector measure of marginal rents correlated best with seasoned estimates of the NTRR would seem to be the premise that the private metrics do a better job of predicting the ultimately revised NTRR than the first look at the NTRR itself does. And importantly, the private measures of marginal rents show continued inflation, albeit at a much-reduced pace, and a still healthy gap between marginal rents and average rents.
The average rent figures incorporated into the CPI and deflator are virtually fated to continue slowing, as I have been emphasizing. Indeed, that is such an easy call that we can probably get away with just netting them out in favor of Observed Rent measures of inflation, such as I present above.
But the idea that marginal rents have been collapsing and that the marginal-average gap is now fully closed is very misinformed to the point of being naive.
Source: BEA, FH calculations
Data are actual to April and a neutral inference from consensus — so far! — for May.
