US Inflation Or Deflation?

There has been considerable debate over the last 12 months or so as to whether the US is moving into an "inflationary" or "deflationary" period. While there is no question that commodity prices have advanced over the last 12 months many commentators state that unless we see a pick up in housing and employment then there will be no inflation.

I am going to focus on the US housing market in this article, specifically the residential rental market. It is common knowledge that the US housing market is "depressed" and that it will take years for prices to pick up. But as it is so often the case markets start moving well before it is common knowledge in the popular press. The fact is that residential rentals are rising in the US and have been doing so for about 8 months, however, I can find little or no commentary on this. I think that for the average investor/commentator out there, given all the negativity associated with the US housing market, it is inconceivable that the US housing market may well be turning the corner!

The 'US CPI Urban Consumers Owners Equivalent Rent of Residences YOY Index' chart below the year on year increase in consumer residential rentals in the US. A change in trend is now clearly evident. Could it be that Ben Bernanke's easy money/high liquidity policies are starting to filter into the housing market? Could it be that a pick up in residential rental rates is evidence of a pick up in the growth of the US economy? Of course these assertions are hard to objectively prove but one thing is for sure - even a 10 year old could tell you that this chart is rising and rising rental rates is evidence of inflation not deflation. Accordingly, given the rise in residential rentals it becomes somewhat difficult to continue to argue that the US is going into a period of deflation!

Visit: US CPI Urban Consumers Owners Equivalent Rent of Residences YOY Index

It is interesting to note that this index turned down in mid 2007 well before the US entered a recession and the Global Financial Crisis hit!

What is the investment implications of rising residential rates? I think that one's portfolio should continue to be positioned for inflation rather than deflation. That is, one should be looking at opportunities to buy equities and commodities and sell fixed income products particularly of the US treasury variety.


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