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Fed’s Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?

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17 comments on Fed’s Preferred Measure of Inflation is Only 4.0%, Anyone Believe That?

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Chart Notes

  • National and 10-City are Case-Shiller home price indexes.
  • Prior to 1999, all the measures of inflation were approximately the same. 
  • OER stands for Owners’ Equivalent Rent. It is the purported measure that one would pay in rent, if one rented one’s own house from oneself.  
  • OER is the single largest item in the CPI with a weight of 24.071%
  • PCE stands for Personal Consumption Expenditures. It is the Fed’s preferred measure of inflation and consistently lags other measures.
  • The PCE trend is amazingly consistent.

Chart Q&A

Paul Krugman 2002: “Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.“

Personal Income

On Friday, the BEA released its Personal Income and Outlays report for June 2021 including an Annual Update.

Key Items

  1. Personal income increased $26.1 billion (0.1 percent) in June.
  2. Disposable personal income (DPI) decreased $2.6 billion (less than 0.1 percent)
  3. Personal consumption expenditures(PCE) increased $155.4 billion (1.0 percent).
  4. Real DPI decreased 0.5 percent in June and Real PCE increased 0.5 percent
  5. The PCE price index increased 0.5 percent.
  6. Excluding food and energy, the PCE price index increased 0.4 percent

I discussed points 1-3 in The Impact on Spending of Three Rounds of Free Money is Waning

This post discusses price indexes and purported inflation. 

Year-Over Year PCE

  • The BEA says year-over-year PCE is 4.0%, the same year-over-year increase as in May.
  • Excluding food-and energy PCE is up 3.5% from a year ago. In May, PCE excluding food and energy was up 3.4%

CPI, PCE, CSAI Percent Change From a Year Ago

Chart Notes

  • Year-Over-Year the CPI is up 5.39%
  • Year-Over-Year the PCE price index is up only 3.99%
  • The CSAI percentages are measures of inflation obtained by substituting year-over-year percentage increases in Case-Shiller measures for OER in the CPI.
  • The CSAI National calculation is up 7.79%.

Economic illiterates (most economists and the brainwashed public) do not count housing price increases as a measure of inflation on the basis that housing is a capital expense. 

So what?

Arguably, the CPI is a measure of “consumer inflation”. OK but it is a very poor measure of “inflation” and that is what matters historically. 

PCE is even worse.

Mish’s Observations On PCE

  • “The Fed’s preferred measure of inflation is nearly as consistent as the returns of Bernie Madoff.”
  • “Excluding everything that matters, prices are falling.TM“

Not Inflation!?

For further discussion of the silliness of using the CPI as a measure of inflation, please see Home Prices Rise Another 1.7% in May But Economists Say It’s “Not Inflation”

Yet, in spite of excluding home prices as a measure of inflation, the Fed Says Inflation Might be Higher and More Persistent Than They Expect.

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Mike Shedlock

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Eddie_T
Eddie_T
2 years ago
One issue I don’t see written about much with respects to inflation is covered in this WSJ piece. Essentially, raising the capital gains tax will strip away all the paper gains people are sitting on now. This has been one of the problems with gold for a long time….it gets clobbered taxwise when you sell. Now the same math will apply to stocks, bonds, and real estate.
Inflation is itself a hidden tax….and when it artificially inflates gains and the government raises taxes to get their “fair share” of those gains….investors will be left holding the bag.
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TexasTim65
TexasTim65
2 years ago
Reply to  Eddie_T
It will indeed for the middle class.
For the rich, they will instead borrow against the value of the asset and pay only the borrowing cost (1-2%) instead of the higher tax cost. Eventually they will turn over the asset against the loan balance so in effect they never pay the capital gains tax. Presumably this is what you plan to do with your investment homes.
The other thing that’s annoying about capital gains tax is that you can’t adjust out the cost of inflation. By that I mean if you hold a stock for 10 years and it gains 25% and inflation over the same time frame (10 years) is 25% then it should be a net 0 since the value of the money is the same now as it was 10 years ago. Yet you have to pay tax on the 25% so in effect you lost money. It’s why the amount of profit you need on an investment has to be more than the price of inflation just to keep treading water.
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Eddie_T
Eddie_T
2 years ago
Reply to  TexasTim65
Thanks. I thought I posted it on the other thread. That was done BC (before coffee).
As of now, living off borrowed equity is my plan too. Unless RE really tanks badly , I will have plenty of that. I ALWAYS try to emulate what works for the real rich. That’s what got this kid from the trailer park this far.
For a self-employed working stiff with no 401K, I think the best assets are
The other option is to cash out now in a down year when capital gains might be a bit lower….although it looks like it won’t be that down for me unless we have to shut down again.
I lean toward hanging in, lowering my nut with a refi, and raising rents to improve cash flow. As long as my RE pays it’s own way, the actual equity is not that important at this stage of my life.  And hanging in gives more options I think. For instance, if inflation gets seriously higher, I need to have an asset that will keep up. Once I cash out, that is done.
And…..not even Biden is talking about completely eliminating the 1031 Exchange….which, if it remains even relatively intact, will greatly benefit my kids.
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Eddie_T
Eddie_T
2 years ago
Reply to  Eddie_T
“best assets are still RE held with modest leverage.”
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Wile E Coyote
Wile E Coyote
2 years ago
The benefits from sourcing cheap labor to reduce production cost has made everything susceptible to Covid hazards in a large variety of countries and the transportation links that tie them together. 
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StickToEconomics
StickToEconomics
2 years ago
But yes! We got rid of “Orange Man Bad” and no mean tweets.

Nevermind, you helped elect a bunch of socialist commies who will never let go of the reigns of power.  But hey, no mean tweets right?

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Bam_Man
Bam_Man
2 years ago
No.
They are now fully invested in the business of deception. Prolonging the illusion that their fake money (which no longer pays interest) has real value.
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ColoradoAccountant
ColoradoAccountant
2 years ago
After a year of badgering I got my son, daughter-in-law, who have my only grandchild, who is my 7 year-old buddy M-F, to sell their house, and I would sell mine.  We bought a big house on the edge of the Metro area.  All that driving for me went away. Work at home and no need to go to the city have doomed the core.
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Anon1970
Anon1970
2 years ago
From last Tuesday to today, the price of Kirkland (Costco house brand) coffee went up by 10%. I suspect that in coming weeks, Coscto and other stores will be raising their prices to keep up with their own rising costs.
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astroboy
astroboy
2 years ago
Reply to  Anon1970
I believe I read that bad weather or some such thing wiped out a lot of the coffee crop in South America or parts thereof, which is possibly the reason for the price increase. Of course, Costco probably bought their coffee via futures months ago in which case it’s greed, or, they figure if the price of coffee goes up people will still buy it (true in my case, I have to admit) so they can keep other prices lower where they’re in more direct competition with grocery chains. 
I can see where food shouldn’t be an inflation measure, a lot depends on weather which is beyond the control of anyone. 
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strataland
strataland
2 years ago
Brilliant. While the graph considers Home Price increase, how do mortgage rates and the relative lowering of month interest rate expense factor into the analysis? 
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Mish
Mish
2 years ago
Reply to  strataland
Analysts justify prices by low mortgage rates but price bubbles are price bubbles. And low interest rates or not, people are either stretching or give up.
I was asked by someone on Twitter to back that statement up and I have a chart, not yet posted to do so. 
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shamrock
shamrock
2 years ago
Reply to  Mish
Here is a chart: link to ycharts.com
Housing affordability is down about 12% in 2021 but still 10% above 2018 levels.  Because interest rates and average salaries.
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ThaomasH
ThaomasH
2 years ago
People buying and selling bonds and inflation adjusted bonds seem to believe the Fed.
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Mish
Mish
2 years ago
Reply to  ThaomasH
The point is bubbles pop
It’s arguable the bond market senses that
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Eddie_T
Eddie_T
2 years ago
“Excluding everything that matters, prices are falling.”
I like that. I’m definitely stealing that line.
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Mish
Mish
2 years ago
Reply to  Eddie_T
I have some doozie quotes coming tomorrow from Hussman, Mauldin, others.
Going to add mine to the list. 
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