Perhaps the scariest part of Tuesday's CPI report is something we also wrote about a lot in 2021: the inflation in the cost of shelter. i.e.: rent.

As we feared, US rental costs are now rising at the fastest pace in over three decades. Shelter inflation over the last 12 months has now risen to to 6.3%, the highest over any such stretch since 1986.

This is significant. Keep in mind that, in line with most household budgets, shelter is the single largest component in CPI - some 33% of the basket.

Housing matters.

Shelter inflation happens for a lag for two reasons both having to do with the innate structure of how the real estate market works:

1. There is a gap between purchasing a building and renting it out, often after some work has been done but also because property is a slower moving business.

2. Most - though not all - American leases come up once a year and so there is a natural waiting period between a rising rental market.

The fact that the housing market is now slowing strongly due to higher mortgage rates is not - yet - a help for the exact inverse reasons to the above.

This underlines a theme we have worried about before and one that is now coming true. Just as many regular, renting Americans are feeling their pocketbooks pinched by higher food and energy costs they are also confronting their apartment or home lease renewal.

In that document they will be finding out that the cost of housing will be leaping by 10% or more.

That discovery will be extremely unpleasant and, for some at least, will have some nasty ramifications. They are already facing less take home pay and will not just cause real economic distress. It will also cause homelessness, housing insecurity and poverty.

When you reflect back on this newsletter's bizarre obsession with inflation in 2021 and 2022 and our deep and almost maniacal concern that a temporary problem was being encouraged to take permanent root this is precisely why.

There is already a housing shortage in America and now there will also be a an affordable shelter shortage as well and not just in the usual coastal "creative class" places.​

But make no mistake, inflation is broad based, even if you remove shelter as well as energy and food from this past month's CPI you are left with an annualized 5.9% CPI rate.

See here:

Obviously, that is nearly 3x the Federal Reserve's mandate which is sobering and should be something investors remember when the next surge of irrational exuberance arrives.

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