Some prices change frequently, notably gasoline. Most of the CPI changes infrequently. This post takes a look at the Atlanta Fed Sticky price project. 
The Sticky-Price CPI from the Atlanta Fed is published on the same day the BLS posts the regular CPI. This is the first time I have taken a close look at the idea.
Flexible and Sticky Prices in the CPI Basket
Are Some Prices in the CPI More Forward Looking than Others?
The Atlanta Fed asks Are Some Prices in the CPI More Forward Looking than Others? We Think So.
Like it or not—and there are many in the “not” camp—the workhorse for forecasting medium-term inflation is the expectations-augmented Phillips curve, variations of which are sometimes called New Keynesian Phillips curves.
In this Commentary, we use the published components of the CPI to compute two subindexes, a sticky-price composite of the CPI and a flexible-price CPI. We believe the evidence indicates that the flexible-price measure is, in fact, much more responsive to changes in the economic environment— slack—while the sticky-price variant appears to be more forward looking.
What makes a price sticky? The answer to this question has puzzled economists since John Maynard Keynes built his General Theory around sticky prices more than 70 years ago. The prevailing belief is that, in some markets, changing prices can involve significant costs. These costs can greatly reduce the incentive of fi rms to change prices.
Count me in the “not” category on the Philipps curve which has repeatedly been proven as nonsense in Fed studies.
For discussion, please see Yet Another Fed Study Concludes Phillips Curve is Nonsense.
As for what makes prices sticky, the authors miss the obvious: Think 12 month leases. Food away from home is another easy one. Restaurants don’t want to change menus every three days, something that gas stations can do easily.
Some would dispute the forward looking claim on the basis rent is a lagging indicator due to the way the BLS smooths things.
For over two years people have been expecting rent to fall and it hasn’t. However, the price of new leases as opposed to renewals are showing price pressures especially in overbuilt markets like Austin, Texas.
Sticky CPI Measures Percent Change From Year Ago
The Sticky CPI and Core Sticky CPI are nearly identical. This makes sense given the respective weights are 70.1 and 63.6.
Sticky CPI excluding shelter has been tracking closely to the overall CPI but that is not always the case.
Where the overall CPI heads will largely depend on rent and Owners Equivalent Rent (OER). The Atlanta Fed weighs the combined Rent and OER categories as 30.4 percent of the CPI.
Those in the rent is lagging camp suggest rent is lagging and they will be right eventually.
OK rent is lagging. But tell that that to the cash strapped renter who sees this chart.
CPI Month-Over-Month
For the 29th consecutive month rent was up at least 0.4 percent. Shelter, a broader category, rose 0.6 percent. Food rose 0.4 percent.
For discussion please see Another Hotter Than Expected CPI Led by Shelter, Up Another 0.6 Percent
Let’s compare the CPI rent of primary residence with four other measures.
What’s Really Going on With Rent? Five Measures to Compare
The rent will soon drop advocates missed the mark for years by placing too much emphasis on the ZORI (Zillow Observed Rent Index), Apartment List, and NTR (new tenant rent) indexes.
All three are measures of new leases although new leases only constitute about 9 percent of the market. Renewals are 91 percent of the market. Apartment list is further skewed by not factoring in seasonality.
For additional details please see What’s Really Going on With Rent? Five Measures to Compare
The Change in Trend is Sticky
The year-over-year weakening of the CPI and the Sticky CPI is partly due the fact that the change in trend is itself sticky. However, the price of gasoline appears to have bottomed and perhaps food prices have too.
If so, some of the benefit of lower year-over-year trend in rent may get chewed up by a rise in flexible CPI components.
Finally, for the next few months, the year-over-year comparisons are a bit harder to beat. So even if the monthly rent measures ease from the 0.40 percent 29 month-over-month trend, there may not be much of an improvement in the year-over-year measures.
Nothing suggests the Fed will be cutting soon.
Powell: “Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.”
The money stock can never be properly managed by any attempt to control the cost of credit. The 1951 Treasury-Federal Reserve Accord is prima facie evidence.
Mish, take a look at super core cpi (i.e. core ex shelter). Up by 30bps MoM or more every month since last July except in October. The last 6 months of 2023 was at an annualized rate of 4.4%, and the Jan print was an astounding 0.85% (but maybe an outlier). It’s peculiar how markets are convinced CPI will soon fall towards the Fed target when its largest component is reaccelerating.
lease rates are reflective of INCOME
if workers can’t afford rents then they’ll move from A market to B market to C market
and put together multi-generations into same homes
of course not having CHEAPER C rentals also means take it or leave it
rather have GOOD tenant at cheaper price than bad tenant any day
The “Thought Leaders” of today would say: “It’ll be different this time” Of course they offer up the same set of morals, principles, and ideology, but just delivered up in a different fish wrapper than the time before.
Rent reduction, is a perfect example of delusion, passed on by the “Thought Leaders” You see, it is much easier to project future success, than more failures over and over, like in the past. There is no use for the word “Nirvana” in that!
Somebody should let them know, that rental cost works just like food cost, gasoline cost, electricity cost etc. Due to inflation, Cost Will Fluctuate!
You see, we have changed things immensely over the past 3 years. We have had way more people making/or have made way more money, than maybe ever before in our Country’s history, and want bigger and nicer living locations (not ownership necessarily. Way more people are now working from home, and want/need more space, the influx of 25+Million illegal immigrants, the amount of kids in college and many looking for off campuses living due to cost, the divorce rate increase, ETC. has all led to rental Inflation, as the need has arisen way more sharply, and faster, than the available affordable inventory that exist. It also hasn’t slowed down at all, and in fact the rental inflation has gotten much, much worse as the numbers climb ever higher, and ever so fast!
With no past successful model, there is absolutely no way to properly prepare. As many hopelessly await word for what to do next, they grow anxious. It’s hard to raise the sails up, over and over, when you always crash before they ever catch any wind. Gets old huh? That’s todays economy and young peoples vision, both at the same time, in most inner cities.
– What is to be done?
> Nothing of value can be done, so nothing should be done. If anything is attempted to be done, then it will only cause more pain and suffering for people, until we claw back to where we were again and have to start over once again. Did that too many times now, let’s take our damn lumps and straighten ourselves out damn it!!!
Food away from home should be the first to unstick since there are easy alternatives. Rent will be stickier but will fall over time as alternatives become available. Insurance, not so much as there are no good alternatives.
Interest rates rising in a decelerating economy. That spells crowding out.
The deficits must be cut.
CPI: rent x5 multi count. Only billionaires have houses in the northeast, the midwest,
the south and the west.
The grains are hammered and food in stores way up, farmers getting crushed. A great way to take over the competition
“I know of no model that shows a transmission from bank reserves to inflation” – DONALD KOHN – former Vice Chairman of the Board of Governors of the Federal Reserve System
“Reserves don’t even factor into my model, that’s not what causes inflation and not how the Fed stimulates the economy. It’s a side effect.” – LAURENCE MEYER – a Federal Reserve System governor from June 1996 to January 2002
Link: Daniel L. Thornton, Vice President and Economic Adviser: Research Division, Federal Reserve Bank of St. Louis, Working Paper Series:
“Monetary Policy: Why Money Matters and Interest Rates Don’t”
Thornton: “the interest rate is the price of credit, not the price of money”
“Today “monetary policy” should be more aptly named “interest rate policy” because policymakers pay virtually no attention to money.”
Paying interest on interbank demand deposits suppresses the real rate of interest for saver-holders. It is extraordinarily stupid.
Paul Volcker was dumb as a rock. Paul Volcker was quoted in the WSJ in 1983 that the Fed: “as a matter of principle favors payment of interest on all reserve balances” … “on rounds of equity”. [sic]
See: Fed Paying Interest on Reserves: an Old Idea With a New Urgency
link to wsj.com
This Romulan cloaking device, the payment of interest on IBDDs, vastly exceeded the level of short-term interest rates which is still illegal per the FSRRA of 2006. The remuneration rate in 2012 exceeded all short-term money market rates up to 2 full years.
Lawrence K. Roos, Past President, Federal Reserve Bank of St. Louis & past member of the FOMC (the policy arm of the Fed) as cited in the WSJ April 10, 1986 “…I do not believe that the control of money growth ever became the primary priority of the Fed. I think that there was always & still is, a preoccupation with stabilization of interest rates”.
Spencer, I could use more explanation of “Paying interest on interbank demand deposits suppresses the real rate of interest for saver-holders.” It seems to me that the Fed’s paying interest reduces the supply of credit elsewhere, meaning borrowers have to pay higher rates to the remaining lenders who aren’t receiving the interest. What am I missing?
I agree that the Fed shouldn’t be paying taxpayer-funded freebies to the banks; rates should be managed by actually tightening the supply of credit as in all of prior history before the last few years. The current policy approach appears to be proving that interest rates don’t constrain the economy nearly as much as tight credit availability.
When rates are at 5% but there’s still a glut of credit in the system, all that happens is that debtors pay a lot more to their creditors, but the total spending power in the economy doesn’t change so aggregate demand isn’t curtailed?
The monetization and sterilization of debt increases the supply of loan funds (if with just the banks, increases outside money and if with nonbank public, increases both inside money and outside money), while decreasing the demand for loan funds (taking debt off the free market).
This effectively lowers the real rate of interest thereby stoking asset prices. It makes investors rebalance.
M*Vt = AD. An increase in interest rates is usually associated with an increase in the transaction’s velocity of funds.
As Dr. Philip George says: “The velocity of money is a function of interest rates”
As Dr. Philip George puts it: “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits”.
Bankrupt-u-Bernanke should be in Federal Prison. Paying interest on interbank demand deposits destroys velocity (sterilizes the monetization of debt), inverts the short-end segment of the retail and wholesale money market funding yield curve. It permits the banks to outbid the nonbanks for loan funds. The opposite scenario is impossible, the nonbanks cannot outbid the banks for loan funds.
As David Stockman pointed out in his book “The Great Deformation”: “The preponderance of their fabled profitability, however, was generated by massive trading operations which scalped spreads from elephantine balance sheets that were not only preposterously leveraged (30 to 1) but also dangerously dependent upon volatile short-term funding to carry their assets.
Indeed, perched on a foundation of several hundreds of billions in debt and equity capital, these firms (Goldman, Morgan Stanley, Bear Sterns, Lehman, and investment banks inside Citigroup and JPMorgan), had become voracious consumers of “wholesale” money market funds, mainly short-term “repo” loans and unsecured commercial paper.”
I.e., Bankrupt-u-Bernanke, along with Zoltan Pozsar, destroyed the nonbanks, where the nonbanks shrank by 6.2 trillion dollars while the banks (which hadn’t suffered disintermediation since 1933), grew by 3.6 trillion dollars. I.e., they destroyed velocity (resulting in secular stagnation).
Interest is the price of credit. The price of money is the reciprocal of the price level. To deflate prices, you drain reserves and at the same time cut the administered rates.
What does this do>it completes the circuit income velocity of funds. The economic engine is being run in reverse. Lending by the banks is inflationary, lending by the nonbanks is non-inflationary (other things equal).
The price-level is predetermined by the FED. If Powell continues with its tight money policy, no growth in the money stock, then prices will fall in the last half of 2024.
You have to be crazy to follow monetary economists that measure money (which they can’t define), using year-to-year distributed lags.
It is appropriate to call economics the dismal science because there are so many errors / myths in its curriculum. Contrary to the pundits, banks don’t lend deposits.
See Dr. Richard Werner:
BANKS DON’T LEND MONEY (youtube.com)
Don’t try and explain that the American Bankers Association. They coerced the removal of Regulation Q Ceilings. In the early 60’s they paid economists not to debate the subject.
Both secular stagnation and stagflation theories were presented as early as 1961.
As Friedman said: “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.”
In Dec 2019 WTIC: SPX hit a 25 year nadir. Wall street : it’s time to buy energy stocks.
NTR and ATRR are important. The waiting list for vacant apt/homes is long. NTR collapsed, but the number of new people moving in/out is small. NTR market cap is small. NTR might grow until it stops. It will stop during vacancies glut
“Nothing suggests the Fed will be cutting soon.”
Nothing?
How about politics, cutting rates because of the desire for an even stronger economy to defeat Trump?
FED cuts are usually reactionary They will cut because they have to not because they want to.
In Dec 2019 WTIC:SPX was the lowest in 25Y, at nadir. Wall street : it’s time to buy energy stocks.
Disinflation is transitory™. Too many people retiring, too many people getting free money, too little workers. No need for fancy graphs, charts, formulas or theory. It’s simple basic math 40% moochers can’t be supported by 60% of workers. It’s a mathematical impossibility. A worker can’t support his/her family then support another 40%, no way it can happen.
It’s going to get inflationary painful the next 10 years.
“It’s turtles all the way down and inflation all the way up!”
The average workers don’t extrapolate. They will do what they can. They might cut the flexible and the sticky items.
In 2002 Ben Bernanke said: “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right. We did it. We’re very sorry.”
In spite of winning the Nobel Prize for his study on the Great Depression, Bernanke “did it again”.
M1 NSA money stock, means-of-payment money, peaked on 12/27/2004 @ 1467.7. It didn’t exceed that # for 4 years, until 10/27/2008 @ 1514.2. That was the most contractionary money policy since the GD.
The National Association of Home Builders Discusses Economics and Housing Policy
“Number of Builders Declined 50% Between 2007 and 2012”
US Government: Number of Builders Declined 50% Between 2007 and 2012 | Eye On Housing
And now there’s a housing shortage, as well as a labor shortage, not enough plumbers, electricians, carpenters etc.
I.e., Ben Bernanke bankrupt America.
That’s because the money supply is sticky.
Depends on the measure.
Technically: _The_ problem, is that narrow money has been made flexible. And that this flexibility is then being abused to render broad money sticky.
Exactly back rearwards of what happens in any free market.
With the entirely predictable result, that the flexibility of narrow money, is being used to debase away people’s savings and earnings. All for no other purpose than to prevent morons so dumb they borrowed; and/or lent; millions of dollars dollars to buy a tulip bulb, from having their “inveeestment”; and with it the artificially pumped up broad money supply it supported; fall back down to free market levels.
In free markets, heck even only fractionally free ones: Broad money/credit can still expand during a boom. But the difference is, that there will be NO narrow money expansion available to bail out those who overextended,once the irrational blowoff of the boom is over.. Instead, they’ll just; all of them; be promptly liquidated. Recursively, all the way until all excesses are cleared out. And hence until all those caught out, are either back to bagging groceries or swinging from lamp posts.
The fact that this may sound harsh; to the economically less-than-literate who are being conned into idiot-belief that “saving the system” is in any way something positive; does not in any way mean that there exists ANY other, even possible, resolution which is ultimately not even harsher: For every unit of lesser harshness experienced by some connected deserve-to-dangle dilettante; much more than one unit of increased harshness is being broadly distributed among people who were not irrationally “speculating” and living high off of ultimately unsustainable beliefs and promises, but who were instead sucking it up and frugally performing productive work.
Re: “For over two years people have been expecting rent to fall and it hasn’t.”
“Housing is considered unaffordable if it costs more than 30% of an individual’s income”.
If housing is sticky, so will be rent. Some companies administer tests to applicants applying for jobs. Powell would have flunked one.
#1 “there was a time when monetary policy aggregates were important determinants of inflation and that has not been the case for a long time”
#2 “Inflation is not a problem for this time as near as I can figure. Right now, M2 [money supply] does not really have important implications. It is something we have to unlearn.”
#3 “the correlation between different aggregates [like] M2 and inflation is just very, very low”.
As Friedman said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output.”
Our means-of-payment money supply hit historical highs in November 2020.
M*Vt = P*T. As American Yale Professor Irving Fisher said, “If the principles here advocated are correct, the purchasing power of money — or its reciprocal, the level of prices — depends exclusively on five definite factors:
…“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”
Anything dealing with humans can never be exact, but, the law of supply and demand is as close as economics will ever get to being a science. From it and a few nuances, everything else flows. Other laws like “price controls create shortages” or marginal utility or the Cantillon effect are derivative.
No, behavioral economics is wrong. The distributed lag effect of money flows have been mathematical constants for > 100 years.
Examples are both the flash crash in stocks on May 6, 2010 and the flash crash in bonds on October 15, 2014. They were both predicted 6 months in advance and within one day.
$7,000,000,000,000 in last 5 years may have something to do with it.
Nothing suggests the fed will be cutting soon.
I beg to differ. The calendar is 2024, and the politicians, of which Powell is, despite alleged impartiality, want to goose the economy going into November, to give Biden a leg up. I suggest one rate cut prior to June is in the cards… despite the economic case NOT to.
You have to WANT to kill “sticky” inflation …… which means you crush the wealth effect that pervades and pollutes this society. Reverse FULLY the bullshit $13T in free and easy money that was handed out over 2 years and watch what happens to “sticky” inflation. We are witnessing the biggest financial sham in history …… “b b b b bu BUT muh 401k needs botox and my home equity too so keep inflating these massive everything balloons please”
The financial system was on the verge of a total collapse in late 2019. Then COVID came along and provided a cover for a bailout of the system. The massive deficit spending we’re seeing is another effort to keep the plates spinning.
The collapse that was late 19 needs to be discussed more. Covid was indeed cover for the stimmies. Not in a tin foil hat way but as a practical matter – they had a opportunity and they took it. More attention to 2019 slowdown is in order.
But, but…doncha know that they produced a study that proves free money (QE, ZIRP) didn’t cause inflation?
It sure inflated asset prices. That’s the way it works: prices go up where the counterfeit money flows.
[Rent of primary + OER(northeast, midwest, south, west)] : 5 ==> average rent.
the israelis are running out of armored carriers and face heavy losses.
sevent two virgins are waiting for u in hell.
The IDF deserves every loss it gets, and then some.
This is why monetary policy does more damage than good at fighting inflation. Take insurance: it is a concentrated industry with very inelastic demand, except possibly indirectly with people buying fewer cars. So, rather than rising rates based on some economists fantasy theories, perhaps one needs to take a look at the structure of the rental and insurance markets.
The rental market is a ‘free market’. Simple supply/demand runs the rental market just fine.
The insurance market however is a COMPLETE SCAM, has no legitimacy at all. When the carriers want to raise profits, they just raise your rates. All in the name of ‘rising costs’, or ‘number of claims last year. Can you say “Ponze Scheme”.
“The rental market is a ‘free market’. Simple supply/demand runs the rental market just fine.”
If Supply and Demand in the “rental” market were even infinitesimally free, I would be supplying thousands upon thousands of additional units in San Francisco alone, as of next month; unless somoene else beat me to it (which they would handily and easily). All while simultaneously 10-doubling available units in Santa Monica. And ditto Malibu and Marin County. Ditto-ditto in any “expensive” market across the country,and even world.
In ANY even remotely free market: Any product as long since solved and simple to produce as a mere dwelling, is very cheap indeed. Probably almost entirely free, after enough years have gone by that those with more means have, across the spectrum, upgraded; leaving the least attractive units sitting there largely just abandoned.
It’s not so much that inflation is sticky as it is that politicians and central bankers are slippery and criminally stupid. How do these fools think they can run endless trade deficits, export all the manufacturing jobs, attack the energy industry, push stupid green technologies, import millions of illegals, start endless wars and deficit spend out the ying-yang and we’re not going to get poorer. Inflation is the American people getting poorer. But don’t worry AI will save us! We live in an idiocracy and Joe Biden is the chief idiot.
That about sums it up, and without any fancy formulas or charts, this is what I call LT monetary theory.
Laymen Terms. 😜
you are getting poorer. They are doing fine
“We live in an idiocracy and Joe Biden is the chief idiot.”
And the reason he is; is that the rest of the ruling classes are even more idiotic.