Commodities | Monetary Policy & Inflation | Rates | US
Both gold and TIPS can provide a suitable hedge for rising inflation, but which is better? In part 1 of this two-part series on US TIPS vs gold, we explained that in order to properly hedge for inflation you should understand what exactly you are hedging against, given that consumption baskets can vary substantially from household to household. In this report, we compare the relative merits of TIPS and gold when hedging specifically against two of the most important components of the CPI: housing and energy. As a first step, we examine in some detail the CPI’s housing component, known in the jargon as Owners’ Equivalent Rent (OER).
Does the CPI Adequately Measure House Price Inflation?
For those unfamiliar with the concept, OER is what a homeowner would implicitly pay themselves or would receive in income were they to rent their home to someone else. OER accounts for roughly one quarter of the total CPI calculation. Given its large weight in the overall CPI calculation, OER can have a large impact on the headline figure. One area of controversy is that OER poorly captures home price appreciation (HPA).
As we can see in Chart 1 above, OER and HPA can vary both in terms of direction and magnitude. HPA was running north of 10% a year during the period leading up to the US housing crisis turned global financial crisis (GFC). In contrast, during that time OER actually slowed from north of 4%, running to about 2% per year. More recently, some housing markets in the US have seen a healthy uptick in price during the COVID period. However, in general, HPA has been fairly steady post GFC, but even so HPA has still been running higher than OER.
Meanwhile, TIPS, on an inflation breakeven basis, have failed to keep up with OER let alone HPA. As seen in Chart 2, there was only one period during which TIPS outperformed and were over-hedging OER, and that was during the period immediately post GFC that saw a sharply lower HPA eventually hold down OER inflation for a time.
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