Illustration: AFP / Wieslaw Smetek / Smetek / Photononstop

The US Consumer Inflation Report for October was horrible, showing a 12% annualized rate of price change. But it’s even worse than it looks. The shelter component of the index lags the more reliable private gauges of rent inflation. That means worse is to come.

Three US companies publish national rent indexes – CoreLogic, Zillow and – and their readings of year-on-year rent inflation range from 9% to 16%. But the US Bureau of Labor Statistics reports a year-on-year rise in the rents of just 3.4%. Shelter represents a third of household expenditures according to the Consumer Price Index.

Before the COVID-19 pandemic, the private indices and the government measure of rent inflation moved in lockstep, albeit with lags in the latter reflecting the fact that not everyone’s lease expired at the same time. Given past lags, the rent increases should have shown up in CPI by now. So I really can’t explain the discrepancy.

Led by used vehicle prices, durable goods prices rose 12% over the twelve months through October, according to the official data. That can be blamed on the chip shortage, which constrained auto production and left consumers and car dealers in bidding wars for everything on four wheels. But the price of nondurable goods also jumped 10% over the past year. That’s simple demand-pull inflation: the combination of a $6 trillion giveaway to US consumers and enhanced jobless benefits that kept 2 million Americans out of the workforce left too much money to chase too few goods.

The annualized 12% inflation number, to be sure, will ease a bit, but rent inflation ensures that the pipeline of price increases will persist for the next couple of years. 5% inflation over 10 years will reduce the purchasing power of money by 80%. That’s unsustainable. Either the Federal Reserve will raise rates and strangle demand, or consumers will balk at price increases and stop buying. Incomes have fallen by 2% over the past year according to the government’s official measure, and by considerably more when shelter inflation is added in. In either case the Federal Reserve and the US Treasury have set the stage for the next recession.

Third-quarter profits for US companies surprised on the upside due to higher profit margins. That’s pretty remarkable given that labor productivity (output per manhour) fell by 5% and input costs rose much faster than final prices. Evidently a sufficient number of S&P 500 companies, notably the automakers, were able to take advantage of shortages to raise prices and profit margins.

In the services sector, which makes up 77% of GDP, input costs are rising much faster than output prices, according to the Philadelphia Federal Reserve nonmanufacturing survey. It’s hard to see how US corporations can repeat this trick in the fourth quarter.