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Chart #1
Chart #1 illustrates how the BLS calculates the shelter component of the CPI. It's almost entirely driven by the year over year change in the Case Shiller National Home Price Index 18 months ago. To explain: the blue line is the year over year change in home prices. The red line is the year over year change in Owner's Equivalent Rent, which dominates the shelter component of the CPI, shifted 18 months to the left. That the red and blue lines track almost perfectly for the past several years is virtual proof that the BLS is using 18-month-old housing price changes to calculate one-third of the value of today's Consumer Price Index. It's crazy, and it's a well-known flaw in the calculation of the CPI.
Chart #2
Chart #2 compares the year over year change in the CPI and the CPI less shelter. There is a huge gap between the two which has persisted for over 8 months. That gap will almost certainly disappear over the next 6-7 months, since that will mark the zero % change in the blue line in Chart #1.
Will someone please mention this to the members of the MSM?
14 comments:
Looking at the S&P CoreLogic Case-Shiller U.S. National Home Price Index - I don't see prices falling. What am I missing?
Dec 2023 310.668
June 22 308.265
March 21 244.234
Also, I live in New England and prices have not come down much.
Who cares? Inflation has already done its damage. Personal saving is down over 40% over the past 4 years, according to the January data from the Bureau of Economic Analysis. Yeah, that's right, down over 40% from PRE-PANDEMIC levels. The lack of savings is going to drive economic results much more than tweaks to inflation.
The dynamics of the cycle of the economy are difficult to model. Here we are in 2024 saying that nobody has a good model. That is a statement of malpractice in the academic practice of economics, at minimum.
Having said that, I think Powell knows all about these lags. He/the Fed don't know enough about the economic cycle to predict the effect(s) of items like savings draw down, RE markets, and other details. It looks like Powell wants to have a good legacy, so he is hiding behind the inflation numbers to keep interest rates "higher for longer". Then he can say he beat inflation. Maybe there's a recession, but that seems acceptable to them.
I would say, plan accordingly.
re: "I think Powell knows all about these lags."
Powell doesn't know squat. To eliminate stagflation, you drive the banks out of the savings business while draining reserves. The 1966 Interest Rate Adjustment Act is the paradigm.
See: The Mechanics of Fed Balance Sheet Normalization - FRB-STL
"The Fed has to watch how take-up at the O/N RRP facility will evolve, as a quick shift into (out of) the facility could drain (boost) reserve balances."
I.e., Powell doesn't know a bank from a nonbank, money from mud pie. MMMFs are nonbanks. Including MMMFs in M2 double counts the money stock.
Dr. Leland J. Pritchard, Ph.D. Economics Chicago 1933, M.S. Statistics Syracuse, Phi Beta Kappa: "“No asset has the “monetary store of purchasing power” quality unless there can be a net conversion of that asset into money. It must be possible to affect this conversion without necessitating that any present money holder reduce/liquidate his holdings”
Case in point, the O/N RRP facility. Aug, 9 WSJ:
“In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply.”
There is both supply-side and demand-side inflation. We will have both.
Both short and long-term money flows contract in the last half of the year.
Do you really believe the official inflation numbers are accurate?
Scott, No quibble with your post. The perspective of the “man on the street” is that food prices, which we have to pay at least weekly, are at 30 yr. highs as a percentage of disposable income (per the USDA). So the perception that inflation is too high and is hurting us remains in place.
@steve j
You asked: "What am I missing?"
Perhaps you're missing that the blue line on chart 1 does not really show "Housing Prices" (although that's what the blue label says). As the post explains, "the blue line is the year over year change in home prices."
You note that the S&P CoreLogic Case-Shiller U.S. National Home Price Index was up less than 1% from June 2022 to December 2023. That's in keeping with the blue line plummeting to touch 0% year-on-year change according to the blue scale on the left of Chart 1.
Re "Do you really believe the official inflation numbers are accurate?" Yes I do, but with some qualifications. I've been working with macroeconomic statistics every day since 1980. While at times I have doubts, I do believe that it is nearly impossible for the government to fudge any subset of the numbers consistently without problems showing up elsewhere. So "reasonably accurate" would be my answer.
The FED doesn't strive to maintain a continuity with their numbers/time series. But the people that watch the numbers will always find the FED's errors.
Any thoughts on PPI?
Powell should be fired. PPI up 6% mo-to-mo
Contrary to the FED’s technical staff, retail MMMFs are nonbanks.
In my 1958 Money and Banking text. “Purchases and sales between the Reserve banks and non-bank investors directly affect both bank reserves (outside money) and the money stock (inside money).”
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