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Food, Rent, and Energy Prices are Totally Outside the Fed's Control

Let's discuss food prices and other factors totally outside the Fed's control.
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CPI data from BLS chart by Mish

CPI data from BLS chart by Mish

On Wednesday the BLS released CPI data. For overall details, please see CPI Year-Over-Year Drops a Bit, But Is it Believable?

This post is a closer look at food prices. 

Year-Over-Year Seven Categories 

  • Cereals and Bakery: 10.3%
  • Meat, Poultry, Fish, Eggs: 14.3%
  • Dairy: 9.1%
  • Fruits and Vegetables: 7.8%
  • Other Food At Home: 11.0%
  • Beverages: 9.8%
  • Food Away From Home: 7.2%

CPI With a Spotlight on Food 

CPI With a Spotlight on Food 2022-04

Chart Details 

  • CPI: 8.3%
  • CPI Excluding Food: 8.1%
  • Food: 9.4%
  • Food at Home: 10.8%
  • Food and Beverage: 9.0%

Food Components in the CPI 

Food Components in the CPI 2022-04

Weight Details 

  • Total Weight: 13.361%
  • At Home Weight: 8.245%
  • Away From Home: 5.116%

These percentages tend to change every month. More specifically, the weights of everything typically change every month.

I covered shelter in my previous post but let's have another look.

CPI Shelter 

CPI Year-Over-Year Percent Change NSA RENT 2022-04

Key Shelter Points

  • Year-over-year rent was only up 3.8% in January and 4.8% in April.
  • Year-over-year OER was only up 4.1% in January and 4.8% in April.
  • OER is 23.816% of the CPI in April.
  • Rent is 7.278% of the CPI in April.

OER is the mythical price one would pay to rent one's own house from himself, unfurnished, and without utilities.

Is rent and OER only up 4.8%? If you believe that, then the CPI numbers are believable. 

OER and Rent are 31.1% of the CPI.

Inelastic Items 

Rent is inelastic. So is food. Together, those two items make up 44.5% of the CPI.

Some of my readers think the Fed can do something about rent. 

Reader comment:

 I don't think rent is inelastic, you can share an apartment rather than have your own, or move back into your parents house, smaller or less desirable rental, etc, etc, etc.

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That is a tiny impact and one hell of a way to go about it. But yes, zoomers can move back in with mom.  

Another Reader Comment: 

I disagree with the notion that the Fed is totally unable to control rents. It most definitely can, albeit with a lag. This is because rents are affected by the underlying price of the asset and by influencing interest rates (especially thanks to its gargantuan balance sheet, which can be used to affect long term interest rates) the Fed can affect the price of housing (both for individuals and investors) and by association, rents. In fact, it is the specific influence of the Fed (albeit in the opposite direction) which was a major driver in the insane run-up in housing prices we’ve seen to date, which in turn was a major contributing factor to rents skyrocketing as well.

But houses bought higher need higher rents to support them., And where are the renters going? Back home with mom? How many will doubling up? 

The Fed can do something about the demand for houses. But that means fewer houses built and more demand to rent! 

The best argument for rent stabilization is the huge numbers of houses under construction thanks to easy money. But is that enough? 

And looking at the CPI, how many rent increases have not really been priced in? Is rent really only up 4.8% from a year ago? 

Education, medical care, and motor fuel are also mostly to totally inelastic. Some  motor fuel use, especially vacation, is discretionary. Driving to work isn't. Of course that assumes you have a job.

At least two-thirds of the CPI is inelastic (demand changes little no matter what the price is). 

Some of the rest is partially inelastic (if you really need a coat you will buy one, but you will skip on buying an extra pair of shoes or a new fishing pole if times are tough). 

Yet, somehow the Fed believes inflation expectations matter. 

Hello Fed, Inflation Expectations Are Unglued, No Longer Well Anchored

Inflation Expectations data from New York Fed, chart by Mish

Inflation Expectations data from New York Fed, chart by Mish

On April 11, I noted Hello Fed, Inflation Expectations Are Unglued, No Longer Well Anchored

It's a good thing for the Fed that inflation expectations don't matter because expectations are now unglued. 

However, this also highlights the difficulty of the Fed bringing inflation under control with rate hikes. 

OER and Rent are 31.1% of the CPI, and Food is another 13.4% of the CPI. What can the Fed possibly do about either? 

Hello Fed, Can You Supply Diesel?

Can the Fed stop the war in Ukraine? Drill for oil? Manufacturer diesel?

At the same time, don't pretend the Fed had nothing to do with inflation. By driving up asset prices, the Fed created artificial demand for cars, second homes, vacations, and other optional services. 

Importantly, a key difference in this recession is de-globalization forces act against the Fed now, whereas previously globalization was a big deflationary force.  

Good luck with that Fed, especially when US weapon deliveries to Ukraine rate to prolong the war, possibly for years.

This post originated at MishTalk.Com.

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