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Alan Reynolds writes:
Consumer Price Index (CPI) inflation has been zero for two months. Over the past 12 months, prices of food at home are up 1.1 percent, and energy prices are up 1 percent. Yet headlines keep focusing on the 12-month averages of 3 percent for the total CPI and 3.3 percent for “core inflation” (less food and energy). But there is a big problem: Those 3–3.3 percent figures do not reflect a broadly defined measure of inflation since they are largely dominated by shelter costs.
Widely criticized Bureau of Labor Statistics (BLS) estimates of rent and owners’ equivalent rent (a price nobody pays) account for a third of the total CPI and over 40 percent of the core CPI.
Reynolds points out that extreme estimates of shelter prices are also problematic for another reason: they lag reality by 12 to 18 months. Of course, since there is a lag, we don’t know what’s happening to shelter prices in recent months.
But without shelter prices, inflation has been low. Reynolds writes:
Here is the unreported good news: Aside from shelter, CPI Inflation and core inflation rose only 1.8 percent over the past 12 months and were either flat or falling over the last two. (bold in original)
What he means, of course, is not that CPI inflation and core inflation rose only 1.8 percent over the past 12 months; he means that CPI inflation and core inflation were only 1.8 percent over the past 12 months.
READER COMMENTS
Kevin Erdmann
Jul 13 2024 at 9:16pm
This muddies the water on the transitory debate too. If you use Zillow rent estimates in place of the lagged cpi shelter component, rent rose and fell quite similarly to other prices. It was running at a pace of more the 10% in spring 2022 then dramatically dropped to near 2% in July where it has remained since.
the Fed funds rate in June 2022 was under 2% and not expected to top 3%. There is no plausible model for claiming that rate hikes or expectations had any meaningful role in the decline of inflation.
analysis that uses the cpi measure with lagged shelter data and then on top of that cites 12 month trailing data instead of monthly, greatly shifts the apparent decline in inflation back in time, making it look like inflation from June 2022 was still working through the system even in late 2023, and that makes the fed rate hikes, which actually followed the drop in inflation, look causal.
vince
Jul 15 2024 at 11:24pm
The Fed began increasing the federal funds rate in March 2022 and decreasing the monetary base. Couldn’t those actions have contributed?
Craig
Jul 13 2024 at 10:30pm
“Reynolds points out that extreme estimates of shelter prices are also problematic for another reason: they lag reality by 12 to 18 months”
When inflation waz peaking at 9.1% OER damped the CPI, now on way down it tends to do the opposite apparently. Housing and cars are funny items because many finance them. One can genuinely ask, “What’s the price?” And for sure if somebody says the nominal price that males sense, but obviously there is the ‘payment’ and with housing that’s mortgage, interest, property taxes and homeowners and with car its the car payment and many mentally lop the car insurance payment onto that as well.
Right now in SoFlo my homeowners went up but my housing payment less homeowners went down when I refi @ 2.25%. If you were to buy my home today the price might be a hair under last year, but the 30 year rate MUCH higher. Also home is ‘homestead’ in FL so property taxes not accelerating with inflation, but if you bought the taxes would ratchet up based on new sales price.
If inflation low I would suggest OER probably not too bad but when inflation zips up I think OER and housing generally has trouble. There’s so many angles to it that I think its just an inherently problematic calculation.
Andrew_FL
Jul 14 2024 at 10:09am
Most rent payments are “existing rents” not “new rents”
steve
Jul 14 2024 at 1:33pm
David- Is there an English major in the family? Wife has several in hers is always fussy about how stuff is written. She complained about everything I wrote so I just made her the editor for all my major writings and speeches.
Steve
TMC
Jul 15 2024 at 9:55am
Steve, David wasn’t just being fussy. There is a big difference in change and its derivative. Reynolds was very sloppy for an economist. If inflation were 3% and rose 1.8% then it would be 4.8% rather than the 1.8% he meant, even that means you have to assume not % but a raise in % points.
Thomas L Hutcheson
Jul 15 2024 at 4:21pm
He should have said the “average price level increased by …”
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