Thursday, October 12, 2023

CPI ex shelter is 2.0%

On a year over year basis, the CPI is up 3.7%. Excluding shelter costs, which we know are artificially inflated by BLS methodology, the CPI is up only 2.0%. It is not unreasonable to think that the Fed has successfully arrested the inflation that was caused by $6 trillion of federal deficit spending in 2020 and 2021. Mission accomplished. No more rate hikes are needed.

Chart #1

Chart #1 compares the year over year change in the CPI index (blue line) and the CPI index less shelter costs (red). The CPI including all prices rose 3.7% in the past 12 months, but excluding just one category—shelter costs, which are heavily influenced by housing prices 18 months prior—the CPI was up only 2.0%. 

Chart #2

Chart #2 shows how BLS methodology effectively uses changes in housing prices 18 months prior (blue line) to drive the Owner's Equivalent Rent component of the CPI, which makes up about one-third of the CPI. Housing prices and rents stopped rising over a year ago, but the BLS is assuming that shelter costs are still rising at a 7% annual rate, thus artificially boosting the overall CPI. For the next six to nine months, the BLS-calculated increase in shelter costs will be dropping significantly, and that will meaningfully reduce the shelter contribution to the CPI. Meanwhile, the CPI has received a boost from rising gasoline prices in August and September; and a lot of that boost will reverse in coming months, since nationwide gasoline prices have fallen in the past several weeks. In short, expect measured inflation to remain low for the foreseeable future. Low enough to keep the Fed from raising short-term interests rates further than they already have.


JC from MN said...

Thanks Scott Any idea where the 10 year treasury yield is going to settle? With the profligate DC spenders and QT there's a lot of issuance to clear. Could it blow past 5%? 6%? Yikes!

Scott Grannis said...

If inflation continues at 2%, 10-yr Treasuries should yield 4.5% at most. A yield of 4% would be quite reasonable, and even generous, in a 2% inflation world. Short-term interest rates would be much lower than they are now: 3 - 3.5% sounds about right.

Ai said...

Any concerns on below comments:

For those wondering why the equity market sold off so aggressively intraday, it was because of the 30-year bond auction.

What happened? The auction drew 4.837% vs. 4.800% pre-sale (vs. 4.345% in last month's reopening auction). That's a 3.7 bps "tail", which is the biggest tail since November 2021, with long-yields highest since 2007.

The message this sends is that the bond market is perceiving inflation as sticky and rates as higher for longer, creating little demand for the long-end. The 30-year yield is up over 13 bps and the 10-year yield is up over 11 bps in reaction.

Richard H. said...

Scott, how do you square 2% inflation with the long term trend of 6% M2 growth you have spoken of many times. Where is the other 4% going? Thanks.

Richard H. said...

I should add that I know some of it goes into growth. But GDP growth is more like 2%, so what about the other 2%?

Thenagain said...

Inflation correlation to M2 growth is shown in the following reference (over the long term):
In the same reference, you will find M2 growth correlation to gross GDP over the long term and, obviously, the 'aggregates' should grow commensurate with underlying economic activity (at least that's what the minds behind the Federal Reserve Act had in mind in 1913). Since GFC and accelerating after 2020, this trend has been broken because of balance sheet expansion at the Fed (QE to non-banks) leading mostly to asset inflation and at commercial banks (holding more securities in correlation to more 'deposits') leading more to main street inflation (and a lower trend than pre-covid for real income growth).
And now the endless discussions due to under-appreciated lag effects.

Richard H. said...

Wonderful. Thank you again - thenagain!
Good synopsis of it all. Very clearly stated.

Thenagain said...

My pleasure. Please provide yourself an opinion about those theoretical concepts that can make a difference in today's environment concerning specific sectors or companies, investing wise.

An added aspect that is even more concerning related to growth of debt aggregates has to do with the long run potential of the economy and of course these days one has to wonder about that too (too optimistic now in this kick the can down the road present environment)..
In the acts, Congress instructed the Federal Reserve to "maintain long run growth
of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates"
Enjoy the ride.

Richard H. said...

... so much to weigh in on. Well, I would say that the era of cold war containment, followed by American dominant political influence, is over (no one believes in our moral fiber anymore). Although our economic prodigy continues, I do not think this is enough to stop the unraveling of political order all over the world.
In addition, our own economic problems/profligacy should make the era of low interest rates over as well. The caveat is the tremendous inventiveness brought on by technology; so far it has been able to keep up with, and even surpass, the deterioration of our character.
Where this means to invest is, I suppose, pretty much the same as it has been, notwithstanding interest rates/valuation. I guess that would still mean tech, health/medicine, and defense. But they are expensive - always. Who knows? I still believe that the only thing that really makes sense are world index funds. Even if you are right about some individual sector, it means you eventually have to balance/sell which incurs capital gains - and that’s if you were right. Only with broad index funds can you just hold forever, even if average returns. Not very exciting, but ..

Thenagain said...

Interesting Richard, thank you.
What do you think of the productivity paradox related to "technology"?

Richard H. said...

I would vote for delayed lag, or fits and starts. There is no question that tech makes us more productive; just look at the smartphone and how it saves time/creates opportunities.
I don’t know the theories behind the "productivity paradox", so I really don’t know. But human nature seems to get lazy for a while after a new labor saving device - until a new impetus makes us more competitive again (i.e. “I am falling behind” as these new productivity tools feed into higher prices for assets, i.e. “I’ve got to get working again ..”) So this interim laziness may be responsible for the conflicting signals on productivity.
Time on our hands also means more roadblocks/paperwork/people who have time to fight development etc. The Golden Gate bridge was built in 4 years in the 1930’s because people didn’t have time to fight for the salmon or for carbon worries. Today it would take 20 years, if it could be built at all.

Thenagain said...

Interesting Richard, thank you.
Your observations make sense.
Did you know that, during construction of the GGB, a "safety net" was built in order to increase safety (resulting in less deaths and higher productivity). Side note: i just finished a verification of some related facts on the internet for this post and now the web sends me links about suicide prevention. :)
Anyways, i guess (my bet) the US will eventually be able to figure it out (balance between safety net and productive growth).
If interested, some academics come to similar conclusions:
And i continue to be fascinated by the roaring 20s (and the period that ensued..).

Adam said...

What Bloomberg ticker do you use for swap spreads? The old ones are no longer valid.
Thanks for your help.

Benjamin Cole said...

Even if inflation takes a couple more years to get to 2%, that is hardly the end of the world.

But we could be near 2% now, as Grannis points out.

The US can't eat prestige anyway, so all the geopolitical talk is may not mean much.

Russia far from being ascendant, and is in a horrible and expensive quagmire. Afghanistan but with huge losses. For what? Everyone in Europe now hates Russia, and they have created an implacable foe on their border. One that is learning how to fight better every day.

China has alienated just about every nation in Asia except Russia, and the beginning of the end for business life in China may be on deck right now. Mao-ism may return.

The US needs to become more pro-business at every level, and pro-property development, and avoid entanglements.

Salmo Trutta said...


Advance Retail Sales: Retail Trade (MARTSMPCSM44000USN)

Sep 2023: -5.8

We get the mal-adjusted data:

Advance Retail Sales: Retail Trade (MARTSMPCSM44000USS)

Sep 2023: 0.7

That's a huge discrepancy.

wkevinw said...

Benjamin Cole- well said.

George Washington agreed that the US should "avoid entanglements".

Benjamin Cole said...


I'd hate to tally up the trillions we would have saved taxpayers had we avoided Vietnam, Iraq and Afghanistan....

You know, volitional wars are an expensive affectation...

Salmo Trutta said...
Net private saving: Households and institutions

Quarterly funding is eating up savings.

Ataraxia said...

When will durable goods prices and auto markets return to economies of scale? Supply chains still disrupting durable goods efficiencies and pricing.

wkevinw said...


The supply chain was a focus of the price disruption/inflation starting all the way back in 2020. First the commodity (mostly raw) market was set up for inflation, which happened from ~late 2020 and lasted until mid-2022. Then the opposite happened- commodity deflation from then until ~3 months ago. These price moves were historic.

The dysfunction has traveled up to the retail markets in durable goods, such as construction and vehicles. Suppliers of these have predictablygamed the markets to try to keep their profits high.

The pandemic impacts are still happening, but coming to an end.

Ataraxia said...


Thanks for your thoughts. So at some point the incentives and opportunities for producers won't support gaming the markets. In micro-econ the subject of cartels is studied (not exactly the sane thing but related to what we are talking about) and the question comes up about how difficult it is for cartels to stay together because in the long run the individual members of the cartel have - incentive to cheat - which dissolves the cartel.

So at some point our free markets will give producers opportunities to make decisions dissolving the rent seeking type behavior supported by the disruption of long run supply chain and economies of scale efficiencies.