Rising home rents show inflation is about to take out a long lease

BLAME IT ON the Lunar New Year, said the government's press release. The holiday fell in January last year but in February this year and that is why we had a return to deflation again last month.

It is true. There are always notable price fluctuations around the time of the Lunar New Year and, when it moves from one month to the next on the western calendar, you can get anomalies that do not necessarily represent the underlying trend.

But there is a greater anomaly to take note of here and it says that, rather than being back in deflation, we may already have an underlying inflation rate of nearly 3 per cent.

The difficulty lies in the private housing component of the consumer price index and it is no minor one. Private housing costs have a weighting of 24.59 per cent in the overall index.

This component does not measure housing prices, however. It cannot and you can understand why by asking yourself a simple question. If you bought your home 10 years ago and home prices are now going up, are you paying more for your home?

Of course not. Your cost is fixed. The only thing that may vary is your monthly mortgage payment if interest rates rise and if you cannot change the pay-down period of your mortgage. Thus to attempt to measure the average person's housing costs through housing prices would be an error-prone task of gargantuan complexity and we have not attempted it.

We instead use housing rents as a proxy for overall housing costs. This introduces another anomaly, however. Most tenants sign leases of two years and, whatever the immediate trend of rents during that period, their rental costs are fixed during those two years.