Is Rent Up 5.6% or 2.5%? It Makes a Big Difference.

Maybe I’m missing something here, but, there’s a big disparity about how fast the cost of rent is rising in the U.S., one that goes well beyond the normal variations you’d expect in data collection such as this.

In the Commerce Department report(.pdf) the other day on residential vacancies and the homeownership rate, the asking rent for vacant units was $721, a figure that, according to reports such as this one from the Wall Street Journal represents an increase of 5.6 percent from a year ago.

However, the Labor Department’s official measure of consumer prices has rents rising at a rate of between 2.0 and 2.5 percent from year ago levels as shown below.

Why is this important?

Well, aside from it being far more expensive to live in the U.S. than what the government says it is in the “official” inflation data (it wouldn’t be the first time this has happened), if rent increases of 5.6 percent were to be used to calculate the inflation rate, some simple substitution reveals that, suddenly, year-over-year inflation today would be 3.8 percent rather than the 2.7 percent reported last month.

More importantly, for Federal Reserve policymakers who prefer “core” inflation (i.e, excluding food and energy) where rent and the nefarious “owners’ equivalent rent” contribute 40 percent to the total, instead of 2.3 percent, so-called “core” inflation would be 3.7 percent, the highest level in 20 years!

Surely, there are important reasons for the difference between the 5.6 percent median rent increase reported by the Commerce Department and the 2.0 to 2.5 percent rate from the Labor Department (not the least of which is that the latter includes kindly landlords who may not feel inclined to raise rents on good tenants in this economy and what, in the fullness of time, will go down as one of the absolute worst ideas in the history of economics - owners’ equivalent rent), but can any of them fully explain why the Commerce Department data is about 150 percent higher than the Labor Department data that is used to calculate the inflation rate?

Once again, this appears to be a case where the government’s inflation data is divorced from reality.