CPI Month-Over-Month as the BLS Sees Things
Month Over Month Key Points
- The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis after rising 0.2 percent in September.
- The food index rose 0.2 percent, with the food away from home index increasing by 0.3 percent and a smaller 0.1-percent rise in the food at home index.
- The energy index rose 0.1 percent in October as the index for electricity increased 1.2 percent.
- The index for all items less food and energy was unchanged in October following an increase of 0.2 percent in September.
- The index for shelter increased 0.1 percent in October
- The index for medical care declined by 0.4 percent.
- The indexes for airline fares, recreation, and new vehicles rose.
- The indexes for motor vehicle insurance, apparel, and household furnishings and operations declined.
The BLS CPI Report says that nets to zero.
CPI Year-Over-Year as the BLS Sees Things
Year-Over-Year Key Points
- The all items index rose 1.2 percent for the 12 months ending October, a slightly smaller increase than the 1.4-percent rise for the 12-month period ending September.
- The index for all items less food and energy rose 1.6 percent over the last 12 months after rising 1.7 percent in September.
- The food index increased 3.9 percent over the last 12 months
- The energy index declined 9.2 percent.
Consumer Price Index Components 1990-Present
What About Housing?
The BLS does not directly include home prices in the CPI. The latest Case-Shiller home price index is up 5.7%.
Instead of using home prices, the BLS uses Owners’ Equivalent Rent (OER). OER is determined by asking homeowners how much they would expect to pay in rent if they rented their own house from themselves.
Ask anyone looking to buy a home what inflation looks like.
Failure to properly account for housing has distorted the CPI continually from 1998 until now.
The Fed did not spot the housing bubble nor predict the Great Recession because it did not understand the asset bubble.
CPI Percentage Weights
What About Health Care?
The BLS says the cost of medical care is up 20% from a year ago.
As anyone buying their own health care how accurate that is. Also ask anyone buying their own health care if it is only 6.97% of their budget.
What About Bubbles?
The stock market and risk tolerance is also a measure of inflation. It is nowhere to be found in the indexes.
Add it all up and the CPI is a gross distortion of reality on many fronts.
Mish
Using house prices is possible, but it mixes the investment portion of homeownership with the rent of shelter portion. It would also lead to a MUCH more volatile CPI.
It’s generally understood that renters pay the landlord’s taxes and insurance, with those immediately affecting rents (in the very next lease anyway).
The renters also pay the landlord’s repair costs over the long haul, but those issues accumulate and tend to get handled less often. I find that most of my houses need minor repairs every year….but also need a bigger input about every five years.
It looks to me like OER probably ends up seriously underestimating the repair portion of home ownership…more so than the other parts since it is not reflected in their normal monthly outlay. How much an individual spends on repairing a home they own is directly related to how long they stay in one house….often major repairs go undone for many years…unless the owners are very diligent. New houses especially…have little in the way of repair costs in the first five years.
OER also underestimates cost of housing because…..if interest is fixed, the payments are fixed (other than escrows for taxes and insurance) and do not reflect inflation in local rents….
Do you think there is a better way to calculate estimated rent? I know there are algorithms used by sites like Zillow….but they aren’t very accurate, as far as I can tell. They are better than nothing…..but I doubt most homeowners even look at that kind of data…..even though they could.
But it seems like those smart people at the Fed could come up with some decent algorithms that might be pretty good…..if……if they wanted to be more accurate and not UNDERESTIMATE inflation on purpose…as a policy tool.
I think that is how CPI got off the rails….they wanted lower numbers and they figured out how to get there. I could be wrong…..
A lot to unpack there:
-“It looks to me like OER probably ends up seriously underestimating the repair portion of home ownership” Say you are a landlord. Just like with taxes and insurance increases in the rent you charge your tenants should be enough to reflect those needed repairs (unless you are a slumlord that just lets your properties fall apart, but the BLS does try to do an adjustment for the age and condition of the unit). So estimating increases in OER using increases in tenants’ rent should give an approximately right answer over a couple of years (though maybe not month to month).
-“Do you think there is a better way to calculate estimated rent?” There isn’t a clear way and statisticians have been debating this for decades. It used to be that everyone used house prices, but that contaminated the cost of shelter with the investment part of homeownership. The Canadian CPI tries to get a the shelter rent cost for home by estimating a bunch of difference components: mortgage interest costs, repair costs, homeowners’ replacement costs, property taxes, etc. but these are all hard to estimate. The US BLS looked into doing that way and rejected it. (I don’t recall why.) The Europeans couldn’t agree on a solution so they just drop shelter costs for homeowners in their inflation measures.
-“But it seems like those smart people at the Fed could come up with some decent algorithms that might be pretty good…..if……if they wanted to be more accurate and not UNDERESTIMATE inflation on purpose…as a policy tool.” Actually the Fed has been trying to stimulate the economy and raise inflation (slightly, like 1/2pp) for most of the last ten years, so this goes the wrong way. They aim for inflation around 2% (as measured by the PCE price index), it has been below that almost all the time since 2010. I think they probably should use the CPI, but that would make the OER issue worse as OER is a considerably larger share of the CPI than the PCE price index (and conversely medical care is smaller). Also the Fed just follows and analyses the inflation indexes. The BEA and BLS create them. Even though they are in the same town you might be surprised how little they talk to each other (kind of like second cousins that see each other a couple of times a year).
Very cogent answer. I thank you for taking your time to respond.
This is what they actually do. They use rents to construct OER. They do not get the monthly price changes from asking owners what they think they can rent there place for. It is a common misconception brought on by not very clear BLS CPI document: link to bls.gov
Note that the question for owners is under the “Weights” section, not the “Price change” section.
“OER is determined by asking homeowners how much they would expect to pay in rent if they rented their own house from themselves.” This is incorrect. That is used to determine the weight of of OER in the index (done once every 2 years).
For the monthly price changes they use rents. (The OER national numbers differ from the rent national numbers because a quote in a heavily owner-occupied neighborhood gets more weight in the OER and less in the tenants’ rent index. Also there is an adjustment for landlord-provided utilities so the CPI doesn’t double-count those energy prices.)
For more see the BLS handbook of methods, chapter 17.
Hard to imagine no inflation with 20% increase in medical care.
Health insurance and deductibles etc are my chief expense and everybody in the family is healthy and nobody takes any medicines.
Fud Food total return ETN was up over ten percent today. $17 to $26 in 5 days.
My healthcare insurance is 18% of my before tax income. Since it has $6,500/person deductible by the time the pharmacy and the doctors are paid my healthcare costs are around 25% of my gross income. My income is too high for an ACA subsidy.
I am not sure by including house price inflation in the index would have avoided the housing bubble at all. The lure of zero rates is just too lucrative for Wall Street to pass by. All central banks are doing it now and that in itself is a powerful incentive to keep rates low. Japan set the trend in the early 90’s. China followed soon after and now everyone does it. It’s a permanent stimulation of the economy that we cannot do without unless we want to end up like Greece or Spain who are in a never-ending depression.
Owner’s equivalent rent is a joke….keeping up with current rent prices is even hard for investors..which is why I depend on professional management to set rents on most of my properties.
Unless someone is a real estate pro with a finger on the pulse of the market….how in the world would they know what their home would rent for?
You could guess…and your go-by would always be your mortgage payment……..and that would most likelybe wrong……on the low side……from day one…..and would get more wrong the longer you owned your home
What would you propose to replace the Owner’s equivalent?
How about actual rents? How about an actual rent survey? Wouldn’t be that hard. No harder than going around to grocery stores and getting the price of a box of corn flakes.
That’s possible to do. Or just use prices realtors register when real estate changes hands. That would be much simpler and the data is already there and is accurate.
Rent is part of the CPI
but OER is the biggest component – see chart
Something akin to the way they did it from 1953 until 1998.
“In the 1953 revision, however, the Bureau changed “from a rent-based method to an ‘asset’ formulation based on five specific costs associated with homeownership: House prices, mortgage interest, property taxes, insurance, and maintenance and repair costs.”
That seems reasonable. I suppose it would have to state by state which is ok.
Bullshit. The grocery store I’ve been going to (Market Basket) has raise the price of cheese for the first time in those 5 years. Broccoli and tomatoes are trending higher, too.