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The Fed will be scrutinizing the latest Consumer Price Index report on Wednesday morning for signs that its campaign to finally extinguish runaway inflation by pushing up interest rates is working. Wall Street expects a slight improvement, with economists forecasting that the CPI in April rose 3.4% from a year ago, a tick lower from March's 3.5% increase.
The CPI has a quirk when it comes to tracking housing costs: It doesn't actually track home prices, because it considers housing values to be an asset, similar to stock prices, which also aren't tracked by the inflation index, noted Lawrence Yun, chief economist at the National Association of Realtors®.
Instead, the CPI measures homeownership costs by tracking what it calls owners' equivalent rent, or the hypothetical amount that a homeowner would pay to rent their house in the current market.
But that's also sparked debate among some economists, given that most homeowners are locked into 15- or 30-year mortgages at fixed interest rates and thus aren't subject to the pricing whims of the housing market.
"Homeowners aren't feeling any impact of the housing rents, because their monthly payment is absolutely fixed," Yun noted. "Their mortgage costs aren't rising according to the inflation number, but it's not part of the CPI." Home prices, of course, are very important for first-time buyers who want to make their first home purchase, although that's not a figure that is reflected by the CPI,” Yun added.