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The ‘Un-Flation’ Watch
David Stockman
May 11, 2014
The Fed is busy printing money and pegging the money market rate at zero because there's allegedly not enough inflation. It even claims to be "missing its 2% target from below"--a formulation that doubtless has several prior generations of central bankers rolling in their graves.

Conveniently, the BLS keeps reporting that inflation is MIA. For instance, during the most recent 12 months, the CPI less food and energy was reported to be up by only 1.2%. Accordingly, our monetary central planners claimed at the last meeting that they had no possible reason to stop flooding the Wall Street money market with 0% short-term money. Indeed, not only was there no inflation threat anywhere on the horizon, but actually they averred to be duty-bound to levitate some more.

Notwithstanding the fact that over the course of a full year most American families buy a lot of food and energy, the Fed persists in using the CPI-ex measuring stick for no better reason, apparently, than that its the shortest price ruler around. But that's where the scam gets too much. Fully 40% of the CPI-ex food and energy consists of OER--that is, owners equivalent rent.

OER is a Washington made economic delusion if there ever was one. For example, more than $1 trillion of our $17 trillion GDP consists of OER according to the Commerce Department. Yet not a single human being has ever paid or even seen an OER. Instead, its an "imputation" made-up by government statisticians based on a survey questionnaire that is even more fantastical.

Once per month a tiny sample of homeowners are asked how much they would charge to rent their castle to a complete stranger. Since 95% of homeowners don't even think about doing that, and since only a tiny slice of the remainder are professional landlords, the survey respondents obviously have no clue as to the answer.

Nevertheless, the BLS records the survey answers--which for the most recent 12 months reflected a 2.5% increase and an average annual gain of 1.6% per year since 2007. Stated differently, as long as the wholly artificial OER remains in its +/-2% range the overall CPI will remain low as a matter of arithmetic. So the Fed will claim in turn that there is no danger of inflation and insist on keeping its printing presses humming.

But what if the cost for residential occupancy faced by real households on Main Street could be measured directly rather than by bureaucratic artifice? Well, the answer is that not only does the private market generate huge amounts of continuously updated information on "asking rents" and the like, but also that the quality and accuracy of such information is extremely high--since it is used by landlords, developers and investors to conduct their businesses.

Trulia is just one of the many vendors of market based information on the cost of residential occupancy. In the most recent 12 months, it reports that rental rates nationwide have increased by an average of 4.5%. And that's not missing inflation from below!

Moreover, in some of the tighter local markets rates are now rising by 5-10%. That obviously implies the kind of painful squeeze on household budgets which used to be called inflation, but which has now been more or less defined out of existence by our monetary politburo.

Moreover, Trulia's data show that this "un-flation" squeeze on the middle class has now become acute. As shown below, in cities like Miami, Oakland and Boston monthly rents now range from 40-60% of the average wage--a burden that towers above the traditional 30% benchmark.

Once upon a time the job of the Fed was to protect the integrity of the dollar and the American people from the theft of inflation. Nowadays, it goes about the business of delivering more inflation to the public. So if those rising rents constitute something risen from below--an inflation hit below the belt would the more accurate expression of it.

David Alan Stockman is a former US politician and businessman, serving as a Republican US Representative from the state of Michigan and as the Director of the Office of Management and Budget.

This article was originally featured at Refer to original article for related links and important documentation.

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