Let’s take a look at the CPI, Core CPI, PCE, and Core PCE. The BEA updated PCE numbers today. 
Inflation Chart Notes
- PCE represents the Personal Consumption Expenditures price index. This measure is from the Bureau of Economic Analysis (BEA).
- CPI is the Consumer Price Index. The CPI is from the Bureau of Labor Statistics (BLS).
- Core for both indexes means excluding food and energy.
The CPI only counts expenses directly paid by consumers. The PCE includes items paid on behalf of consumers.
The PCE thus overweighs medical expenses paid by employer health benefit, Medicare, and Medicaid. The CPI overweighs housing related expenses.
Inflation Matters, Not Just Consumer Inflation
Neither the CPI nor the PCE directly includes home prices. It’s a huge mistake to not consider home price inflation (asset inflation in general) in any measure.
Including home prices, inflation had been booming for years. Economists, including the Fed, ignored this inflation.
Case-Shiller Home Price Indexes, the CPI, Rent, and OER
Case-Shiller Chart Notes
- The latest Case-Shiller home price indexes is for May. It represents repeat sales of the same house in roughly a March-April timeframe.
- OER stands for Owners’ Equivalent rent. It’s the price one would pay to rent one’s own home, unfurnished, without utilities.
- CPI is the consumer price index.
- Rent of primary resident is just what it sounds.
- CPI, OER, and Rent as as measured by the Bureau of Labor Statistics (BLS).
Home prices wildly disconnected from the CPI in 2000 and in 2013. The disconnect accelerated in 2020 thanks to the Fed’s QE program and artificially holding interest rates ridiculously low.
Inflation matters, not just consumer inflation. Three rounds of massive fiscal stimulus compounded problems for the Fed.
Personal Current Transfer Receipts
Free Money
Personal Current Transfer Receipts are income from which no services were performed. Medicare, Medicaid, food stamps, Social Security, and three rounds of free money fiscal stimulus during the Covid pandemic are examples.
When you hand out sudden, massive, amounts of free money, expect inflation. And that is just what happened.
The free money rolls on. Prior to the pandemic PCTR was $3.2 trillion, annualized. It’s now $4.1 trillion.
Real PCTR was $2.9 trillion and is now $3.2 trillion. Thanks to inflation, free money does not buy as much as it used to. Fancy that.
Real Personal Spending Rises Twice as Much as Income in June
For discussion of the latest spending and income numbers, and personal consumption expenditures in billions of dollars, please see Real Personal Spending Rises Twice as Much as Income in June.
The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again
Also note that The Housing Bubble, as Measured by Case-Shiller, Is Expanding Again.
Meanwhile, the Fed is watching the PCE, seemingly oblivious to the massive asset bubbles in housing and the stock market that it helped create.
Asset inflation (mainly Real Estate and stocks) stoked by the fed with near zero rates for so long, will prove to be more of a driving factor on current inflation than the Covid stimulus rounds. On leveraged assets, these low rates obviously drove prices way up, thus increasing the perceived money supply far greater than any stimulus. Will take time for these asset classes to feel the effect of higher rates. Commercial real estate and stocks will feel the effect when their current low interest debt obtain during this low rate period expires and has to be rewritten (CRE bonds and corporate bonds mature in relatively short order), causing their values to fall as the multiples will have to work with higher debt service cost. Residential housing values will remain high until new construction can build the low inventory problem away. Nobody with a 3% mortgage 30 year fixed mortgage will want to sell their house and replace with a 7% mortgage, so inventory will remain low far beyond anyone’s expectations and hood prices high.
Mish has identified this residential real estate conundrum in previous posts, but I don’t think to the fullest extent its impact will really be. Expect residential prices to remain elevated for quite some time, which will keep homeowners flush with equity and artificially confident in their balance sheet. Homeowners will remain far too confident in their economic situation for far too long, and keep spending most of their free cash instead of saving. This will keep inflation very sticky longer then most expect, especially the fed who created the problem, they just don’t get it.
re: “Fancy that.”
Yeah, money is supposedly neutral.
basic M1 up over 100% from 2020. m2 up huge, in vicinity of 40% since 2020. all those price inflation numbers are poppycock imho. everyone of us has a different cost of living. some rent and have zero autos and live easy walking distance, within hundreds of very high quality and reasonable immigrant owned restaurants of every imaginable variety. in past years of my life i owned dozens of 1, 2 and 5 family houses, had multiple autos and huge construction equipment and employed many men………..all those us government constructs of inflation numbers are such a bunch of bunk. i’m surprised you spend so much time. the FED has only one true mandate. to insure at all costs, her LITERAL owners, the NYC banks are solvent and profitable with the free money the FED conjures up with the stroke of a computer mouse and zero key. the federal reserve is about as federal as federal express. come on mish. do some digging and report on the biggest scam of our age. the privately manufactured free money for the FED’s true owners, the NYC bankers. the rest of their bunk they spew every 6 weeks is pure unadalterated grifter talk. perhaps Trump would make a fine FED chair in the future. keep up the great real estate stuff.
Mish: Lacy Hunt made a very important point that in Q2 a whole 2% of GDP was a result of the auto sector returning to normal YOY. This is an artifact of supply chain issues peculiar to the auto industry that will have 0 effect in future numbers.
link to marketsanity.com
This assumes these supply issues were relevant only to the auto industry.
Good grief Mish! I’ve supported you all these years, tried to compliment you with my comments and still you Ghost Post Me? I remember all those wonderful times, as Truthseeker we used to whoop it up years ago, sadly it seems like with all your success, the success of your blog is more important than embracing spiritual truth!
Yeah I know that I am in the minority when I say the stock market is not in a bubble. Why? It’s not the 1950s anymore. So many companies today have profit margins over 50%. High margins translate into higher stock market multiples. But more importantly, companies in today’s economy can reach billions of people and grow much faster than when their markets were just a few million. Faster growth translates to more cash sooner and higher stock market multiples. The faster companies can grow earnings, the higher their multiple. Something henry Ford could not do with the technology and reach of the time period.
Since you have been doing this for so many years and understand it better than anyone else why don’t you go for it with MII, Mish Inflation Index? You would want to combine all four measures of inflation in your own supreme or deluxe index, knowing how to weigh each one. If you try to spread it out with Mish Core, or PCE, or CPI or OER it’ll just be another boring inflation index. Certainly you can tweak your index in some special way that would make sense.
Not a Ghost Post.
I will not disclose the rules – but you are now approved.
Instead of the imprecise and understated inflation statistics, the Fed should be watching M2 money supply. It has come down a little but is still greatly elevated above pandemic levels. This deluge of money created hasn’t been sufficiently curtailed.
What is the explanation for keeping the money supply so high when inflation is ostensibly their top priority? It appears the plan is to let inflation burn so that asset markets can be driven higher while relying on the government agencies to measure and adjust inflation down toward the 2% target.
And for the untold millions who get left behind by rising costs and unaffordable housing? It seems they will try to mollify them with more food stamps, disability and debt forgiveness programs.
Unfortunately, it looks like neither political party is interested in holding the Fed accountable regarding the unscrupulous money printing and huge upsurge in money supply.
AMZN cancelled WFH. Those who don’t come to the office : voluntary resignation,
no compensation.
Unfortunately, AMZN drivers can’t work from home. On occasion i drive up Hollywood Way and sometimes come across a parade of AMZN trucks that just left the facility up by the airport.
Aug might be a keystone month : NDX BB : Nov 5/10 2021, 16,454.48/15,905.28.
The bear might takeover. How far it can go : we don’t know.
Since all measures are understated and mostly fraudulent, what difference does it make?
These numbers are NOT fraudulent, annualized federal interest expense. This reading is ONLY through Q2: $970B. DANG! That’s a big number and it’s only going to get worse as we move into FY2024.
link to fred.stlouisfed.org
And, here’s the current annualized tax receipts. Note the big drop over the last two quarters. We’re now back under $3T taken in annaully.
link to fred.stlouisfed.org
And here’s the annual budget deficit that will soon climb upwards towards $2T over the next few months.
link to fiscaldata.treasury.gov
The engines canna’ take na more cap’n… she’s gonna blow!
None of the inflation figures. The FED looks at the 3 month t-bill rate and nothing more.
Absolutely. Elliott Wave showed they nearly overlap. EW also showed major central banks exhibit the same behavior with respect to their nation’s short-term bond rates.