What Is Really Going On With Rent and Healthcare Inflation?

Episode Summary

Executive Summary: The episode unpacks why inflation remains sticky even as some market indicators cool, focusing on how CPI is constructed, why private rent and wholesale price data can diverge from official readings, and what upcoming methodological quirks mean for core inflation. Guest Omer Sharif argues used cars, rents, and especially health insurance should soon drag core CPI lower, though not always in ways intuitively tied to real-time market conditions.

Main Topics: Inflation outlook and the likely turn lower (Priority: 5/5): Joe, Tracy, and Omer discuss the recent disappointment in inflation data but argue that core inflation may ease in coming months, especially around year-end, as several categories roll over. Used cars and the lag between wholesale and CPI (Priority: 5/5): Sharif explains that wholesale used-car prices have already fallen sharply, but retail and CPI measures lag by roughly two to three months, so declines should show up soon. Rent, shelter, and the difference between private data and CPI (Priority: 5/5): The conversation emphasizes that Zillow/ApartmentList-style measures track new leases while CPI covers the full rental stock, explaining why official rent inflation can stay hot after private measures cool. Health insurance as a major upcoming drag on core CPI (Priority: 5/5): A major segment of the discussion covers how CPI health insurance is measured through insurer retained earnings and why the October update is expected to flip from a monthly boost to a large drag on core inflation. Why CPI methodology can seem counterintuitive (Priority: 4/5): The hosts and guest discuss criticisms of CPI construction, including sample-size limits, lag structures, and the fact that the index aims at cost-of-living measurement rather than a pure market-price tracker. Services inflation and reopening volatility (Priority: 4/5): Beyond shelter, non-shelter services inflation is described as oscillating with reopening effects in travel and leisure, rather than moving in a straight line. Podcast promos embedded in the transcript (Priority: 1/5): The transcript includes promotional segments for Bloomberg Stock Movers, Bloomberg News Now, and BiggerPockets, which are not part of the inflation discussion but interrupt the episode.

Key Arguments: Inflation was disappointing in the latest print, but several core components are likely to decelerate over the next few months, especially by Q4. Used-car wholesale prices have already fallen 10%-12%, and the CPI should catch up after a two-to-three-month lag. Private rent indexes are useful for spotting turning points, but CPI measures the whole rental market, not just new leases. Rent is a huge share of core CPI because shelter dominates the services side of the index. Health insurance CPI is set to move from a roughly +2% monthly contribution to about -4% once the annual update hits, creating a sizable drag on core inflation. The BLS methodology is imperfect but designed for apples-to-apples cost-of-living measurement under budget and data constraints. Non-shelter services inflation has been volatile because of reopening-related swings in airfare, hotels, and related categories.

Data Points: Core CPI monthly rate: about 0.5%-0.6% - Sharif says core inflation has been stuck around this range for close to a year. Used-car wholesale price decline: 10%-12% - Manheim, Black Book, and JD Power-style wholesale measures were cited as falling sharply over the past six to seven months. Black Book retail index change: down about 2.5% in August - Evidence that retail used-car prices are starting to follow wholesale declines. CPI shelter weight in core: 40% - Rent and owners’ equivalent rent together account for roughly 40% of core CPI. Medical care weight in core: about 11% - Medical care is described as the second-largest core component. Monthly medical care contribution: about 0.5% per month / 5 basis points to core - Medical care had been steadily adding to core inflation before the upcoming reversal. Health insurance monthly CPI contribution: +2% now, expected -4% after update - Sharif says October’s annual refresh should flip health insurance from a monthly boost to a drag. Health insurance year-over-year rate: about 25% currently, expected to reach about 28% before turning negative - Illustrates the mechanical effect of annual updating. Health insurance projected swing on YoY basis: about -40% by September 2023 - Sharif expects the index to move from +28% to -40% year over year. Core CPI impact of health insurance swing: about 80 basis points - He estimates the swing could subtract nearly a full percentage point from core inflation over the next year. Used-car lag pre-pandemic: about 2 months - Wholesale moves used to show up in CPI with a roughly two-month delay. CPI rent sample frequency: about every 6 months per unit - BLS revisits sampled rental units on a six-month cycle rather than monthly. CPI has individual components: 243 - Sharif notes the CPI contains 243 individual components. Mortgage interest in CPI removed: 1983 - The methodology shifted to rental equivalence, eliminating mortgage interest from the index. BLS new-vehicle methodology update: April of this year - BLS moved to a JD Power-based transaction data method for new vehicles.

Pivotal Quotes: "“I think probably, you know, the turn of this year is what I'm thinking is we're going to start to see the monthly rate, especially the core, start to really kind of come off.”" — Omer Sharif: His broad forecast for inflation easing after a prolonged stretch of sticky core readings. "“I wouldn't necessarily say it's stale. I would just say that it measures something different than what these private sector indices are measuring.”" — Omer Sharif: Explaining why CPI rent can diverge from private rent indexes like Zillow or ApartmentList. "“Starting in October, that index is going to turn negative.”" — Omer Sharif: Referring to the health insurance component of CPI and its expected shift into a major drag on core inflation.

Implications: Listeners should expect headline inflation debates to hinge on methodology as much as economics. If Sharif is right, used cars and health insurance will help cool core CPI soon, but rent and services dynamics may keep policy and market interpretation messy.