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Three Measures of Inflation are All Running Hot

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35 comments on Three Measures of Inflation are All Running Hot

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Three Measures Year-Over-Year

  • PCE: 4.26% August
  • CPI: 5.25% August
  • CSAI: 8.82% July

Descriptions

  • PCE: Personal Consumption Expenditures. It differs from the CPI in that it includes prices paid on behalf of consumers such as Medicare and Medicaid. It does not directly include home prices and it underweights rent and overweights medical expenses compared to the CPI. The PCE is calculated by the BEA, the Bureau of Economic Analysis.
  • CPI: Consumer Price Index. This is the standard measure of alleged consumer prices. As with the PCE, the CPI does not factor in housing prices. The largest component of the CPI is Owner’s Equivalent Rent (OER), a fictional price that consumers would pay to rent their own house from themselves, unfurnished and without actual utilities. OER makes up a whopping 24.26% of the CPI. The Bureau of Labor Statistics (BLS) computes the CPI.
  • CSAI: Case-Shiller Adjusted Inflation substitutes actual home prices for OER in the CPI. I derive this measure starting with the CPI.

Inflation Matters

The Fed’s focus on consumer inflation via PCE or CPI is seriously flawed.

The fact of the matter is “inflation matters” not just alleged consumer inflation.

Inflation matters because bubbles matter. My CSAI measure is certainly not perfect. But it is a better measure of inflation than anything that ignores home prices completely as do the CPI and PCE.

Case Shiller Home Price Index

Supposedly there is no signs of inflation in the above chart. I don’t buy it.

Yes, it’s true that most people already have a home and only those looking to buy are directly impacted.

Housing used to be in the CPI directly but on the basis that housing is a “capital expense” not a consumer expense the BLS removed housing in favor of OER.

Until 2000 removal of housing from the CPI did not matter. The next chart shows the disconnect.

Case Shiller National, Case Shiller 10 City, CPI, OER and PCE 

It’s Inflation Stupid!

OK home prices are a capital expense. So what?

Inflation matters, not just alleged consumer inflation.

The idea that housing prices do not matter is absurd especially when the Fed has a stated mission to make up for the alleged lack of past inflation.

Fed Sponsors Bubbles

It’s not possible to weight junk bond or equity bubbles but it certainly is possible to factor in home prices.

The Fed is actually sponsoring bubbles in a clearly overheated housing market.

For discussion, please see How the Fed Props Up an Overheated Housing Market in Three Pictures

For more details on a housing-adjusted CPI, please see Real Interest Rates Hit New Record Low as Home Prices Hit New Record High

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Mike Shedlock

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FromBrussels
FromBrussels
2 years ago
Why is gold so cheap when compared with all those insanely inflated bubbles  like stocks ,bonds, housing, crypto etc ?  
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Steve_R
Steve_R
2 years ago
Reply to  FromBrussels
As far as crypto, think of the IMF holding countries like El Salvador hostage with their loans, now they have an alternative to get out. Brazil, Panama, now have bills in their government that could also decided if they will accepted bitcoin as legal tender. Bitcoin up over 51,000 again today.
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StukiMoi
StukiMoi
2 years ago
Just look at broad monetary measures. The broader the better, now that The Fed has de facto promised to make anyone whole forever, lest it’s beloved (and anyone-even-semi-sentient’s despised and ridiculed…) “system” “collapses.”
Outstanding credit has exploded. That’s the best, and only proper, inflation measure in the Fed bailouts era.
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tbergerson
tbergerson
2 years ago
The upending of the entire world economy is going to have some reverberating data anomalies.  While the whole housing inflation issue is a serious one, it remains to be seen whether the temporary idea bears out or not over time.  Energy is likely the key.  It is the time series most closely correlated with measured inflation.  Crude pushing $80 today (WTI, Brent is already over 80).  The Nat Gas crisis in europe is getting out of control.  It was up 20% in a day today.  Quadruple prices some months ago.  If it stays that elevated that is a civil unrest kind of thing, depending how it is handled
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Casual_Observer2020
Casual_Observer2020
2 years ago
Ivermectin failed in Brazil.
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tbergerson
tbergerson
2 years ago
Reply to  Casual_Observer2020
Interesting.  So one wonders then why it appears to have worked in India, and Africa, but not in Brazil.  i look forward to seeing this analyzed more.  Oh wait, we wont because such discussion is not allowed.
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Carl_R
Carl_R
2 years ago
Reply to  tbergerson
The real tragedy regarding Ivermectin is that there were no large scale double blind tests done on early intervention with IVM. They should have been done early on, and then we would have some real data. Instead we ended up with small scale trials done in places like Egypt, Peru, and Bangladesh.  Given that Ivermectin was one of the very first drugs identified as a potential repurposed drug, having a trial commence immediately would have seemed obvious. Given that it is off patent, I understand why there was no drug company interested in financing such a trial. However, the lack of any other funding sources shows a shortcoming in our medical research system.
HCQ did get some trials early in the pandemic, but they all had the same serious flaw. Because they were not being done by drug companies, they were done by hospitals in their course of practice. Now, no patients are in the hospital until they have advanced cases, so all the studies dealt with people with advanced cases. It was established that HCQ was not a good choice for a drug to be given to people with advanced Covid. Is it a good drug to be given to people  (with zinc?) as soon as they test positive, before they have an advanced case? How would I know? No large scale studies were ever done on that.
Drug companies pay for tests on drugs that are likely to be profitable. Hospitals run studies on what works on advanced cases, in a hospital setting. Who is there to fund studies on off-patent drugs given at first sign of infection? Apparently, no one. Thus we are left to conclude from the high death rates in countries like Brazil and Peru that used a lot of IVM that IVM provides little if any benefit. That might not be true, though. Perhaps there are other reasons for high death rates in those countries. We are just left to wonder.
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Carl_R
Carl_R
2 years ago
Reply to  Carl_R
Well, there was one large scale trial of Ivm that was concluded in August of this year, the “Together Trial”.  A year late, but better than nothing. It apparently showed a small benefit, but did not reduce deaths or hospitalizations. That sounds about the same as remdesivir, only cheaper.
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Eddie_T
Eddie_T
2 years ago
Reply to  Carl_R
Agree.  I‘d still like to know more, and there are two good studies going on here in addition to the UK study, one at Duke and one  at U of  MN.  We will know eventually.
The Brazil situation makes it look less promising, but that’s not real science, just more anecdotal information.
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KidHorn
KidHorn
2 years ago
Reply to  Carl_R
There are a lot of studies funded outside of drug companies. NIH funds a lot of research into how covid effects youth, the elderly, colored people, etc… But they don’t seem to want to fund something that might prevent covid outside of inoculations. Strange.
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tbergerson
tbergerson
2 years ago
Reply to  Casual_Observer2020
Also interesting that someone looking an awful lot like a paid Pharma influencer inserts this in the comments on an article about inflation.
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Bam_Man
Bam_Man
2 years ago
Luckily, I am earning 0.11% on my Money Market account.
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Casual_Observer2020
Casual_Observer2020
2 years ago
Trillion-dollar platinum coin could be minted at the last minute
“Voila, we’d have bought ourselves the equivalent of a trillion-dollar increase in the debt limit, without any impact on inflation,” says Diehl.
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Bam_Man
Bam_Man
2 years ago
Reply to  Casual_Observer2020
Why does it have to be a coin?
Why not a $10 Trillion banknote with a picture of Charles Ponzi on it?
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Casual_Observer2020
Casual_Observer2020
2 years ago
Reply to  Bam_Man
That would require more security and a plate. A coin is easier to make than a bill from what I can gather.
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TheWindowCleaner
TheWindowCleaner
2 years ago
TAXES. DO. NOT. FUND. THE. GOVERNMENT. They are rubbished and T-notes created in their place. Private banks create upwards of 97% of our money, so PUBLIC “DEBT”. IS. NOT. THE. PROBLEM.  That means that the banks are granted a virtual monopoly on not only the creation of our money, but even more importantly a monopoly paradigm of DEBT ONLY…which makes their monopoly powers even more dominating considering that PRIVATE DEBT, WHICH IS THE REAL ECONOMIC PROBLEM, is continually increasing, hence continually adding costs. The economic solution is to intelligently and strategically integrate the new monetary and financial paradigm of DIRECT AND RECIPROCAL MONETARY GIFTING into the DEBT ONLY system. 
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Webej
Webej
2 years ago
A better measure of housing inflation (but perhaps impossible to calculate) is how much people are paying to service their mortgage & real estate taxes.  Most people (not all, but many of those sensitive to marginal prices) are buying a monthly payment.
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Doug78
Doug78
2 years ago
Social Security and Medicare by Congressional mandate have payments tied to the inflation rate so i doubt if the government would see the wisdom of including housing prices into the official CPI since it would increase their costs. Otherwise I am fine with your new index calcultions because the present CPI has been flawed ever since  real estate housing has become an investment vehicle for financial institutions nationwide where as before it was confined mainly to commercial real estate and to a few large cities. Myself and I think many do the same thing look at my personal CPI and add or subtract components when they become too expensive or too cheap. I own real estate and am not planning to buy or sell any so I have not much interest there. I am much more interested in tax inflation at this point in my life.
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Tony Bennett
Tony Bennett
2 years ago
“The Fed is actually sponsoring bubbles in a clearly overheated housing market.”
…
Pfft  All Jerome Powell cares about is another term as Chairman.  His current term expires in February and POTUS has not nominated anyone yet … well, I guess he might be interested in continuing to pump up his solid 8 figure (possibly 9) personal portfolio …
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Tony Bennett
Tony Bennett
2 years ago
“a fictional price that consumers would pay to rent their own house from themselves,”
…
Absolutely makes sense defer to folks who bought / inherited home years (decades) ago  their thoughts over hard data of Case Shiller home prices or rental rates.
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RonJ
RonJ
2 years ago
“Three Measures of Inflation are All Running Hot”
Goldilocks and the three bears.
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Scooot
Scooot
2 years ago
The Fed must be very pleased, they’re achieving they’re stated aim of making everything more expensive for everyone. 
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ToInfinityandBeyond
ToInfinityandBeyond
2 years ago
Reply to  Scooot
Throw da bums out.
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Carl_R
Carl_R
2 years ago
Reply to  Scooot
Just remember that the Fed is merely the tail, not the dog. Anything government spends that is not paid for by taxes must be taken from the population at large  (including foreign holders of USD) another way, in the form of loss of value of the dollar. The Fed’s role is to facilitate the deficit spending, and to deflect blame from Congress, but the cause of inflation itself is Fiscal policy. If the government balanced the budget, the Fed would have nothing to do. I give the Fed a lot of credit. They have been remarkably effective and keeping the value of the dollar up, and inflation down, in the face of continuous massively foolish Fiscal policy. As Fiscal policy becomes increasingly foolish, how long can they continue to keep all the balls in the air? Five years? Twenty? None? I don’t know.
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ToInfinityandBeyond
ToInfinityandBeyond
2 years ago
It’s bubbleicious. 
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ToInfinityandBeyond
ToInfinityandBeyond
2 years ago
The Fed has completely polluted the US financial system with “free money” distorting almost every measure and statistic.  FYI. The S&P 500 hit an intraday high of 3,337 on January 1st 2020.  Even after this recent pullback from an October high of 4,537 down to today’s 4,319 the S&P 500 is still up almost 30% from January 1st, 2020.  In what universe does this make any kind of sense even taking into consideration that the stock market anticipates future growth.  
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Casual_Observer2020
Casual_Observer2020
2 years ago
Reply to  ToInfinityandBeyond
Maybe its just speculative money driving the markets. If there is more liquidity chasing after assets, this can happen. There is still a lot of money looking for any return. 
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tbergerson
tbergerson
2 years ago
Reply to  ToInfinityandBeyond
Nothing makes much sense any more.  This looks like late stage stuff finally though.  A 12+ year bull market (event crash last year doesnt count, was NOT a bear market) is very long.  Now that has been the case for a long time.  Persistently low rates has allowed executives to borrow cheaply (sometimes less than the Federal Government) and use the proceeds to reduce the public float.  It is one of the greatest scams of all time.  Give yourself stock options, borrow to buy back stock, so by definition ceteris paribus per share prices rise (along with earnings per share as there are fewer shares outstanding), options go into the money, get super wealthy.  Rinse.  Repeat.
I dont have the numbers but it seems like a LOT more stock is being issued now.  That was similar to the late 90s.  Before Sarbanes-Oxley.  I wonder how many companies are in Wilshire 5000 now.  Over the least 15 years it has dropped from over 5000 to under 3500.  As rates have been very very low, turning stocks into a proxy for bonds for retirement fund managers (TINA).
If there are more shares being issued than retired, that is when markets will have a headwind.  Or recession.  Real recession.  Probably a year or two or three out.  The whole China debt implosion, if it occurs, and things are trending that way but can be arrested, might play in.  Nothing is certain.
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KidHorn
KidHorn
2 years ago
The BLS will redefine inflation so as to keep it as low as possible. Too many COLAs are tied to it. If COLAs go up 5-10% in any given year, it’s game over.
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TexasTim65
TexasTim65
2 years ago
Reply to  KidHorn
Correct. I am very interested to see how much of a COLA increase is given out in social security and to the wages/pensions of unionized employees who have their numbers tied to COLA too.
I expect the government hopes to get away with 3.5 or less but I bet if they try there will be a lot of protests and unrest.
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Eddie_T
Eddie_T
2 years ago
 The next bubble might be oil. I actually don’t even want that to happen, but technically it looks likely to break out, and ZH, as of this  morning, says the hedgies are piling into oil.
I have one new pick to add to my portfolio…..TTE, Total Energies, the French giant.
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Doug78
Doug78
2 years ago
Reply to  Eddie_T
Total is fine. I have some. I also bought EDF when the markets tanked in 2020. I am quite happy with its move these last couple of weeks. 
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Eddie_T
Eddie_T
2 years ago
Reply to  Doug78
Always glad to get your picks. ty
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Doug78
Doug78
2 years ago
Reply to  Eddie_T

I don’t remember if it was you but a while ago someone asked
me how much fuel EDF has for its reactors on hand in case of a problem
with supply. A few days ago a EDF spokesperson said that they have 10 years of
fuel on French soil and could furnish the country that long at present consumption.
That is much more than I had expected. Apparently they have been aggressively stockpiling
it. 30% of their uranium comes from Mali so I expect they see trouble ahead and
are putting a lot aside for a rainy day. France itself does have uranium
sources underground so they are covered in a pinch. 

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tbergerson
tbergerson
2 years ago
Reply to  Eddie_T
In commodities the cure for low prices is low prices.  And vice versa.  Low prices makes investment in exploration and production less viable.  Also the rise of ESG (most of which is just farcical rebranding, like AI) has hurt investment as well.  So Western oil is underinvested.  With Delta looking likely to have petered out demand will exceed supply for some time.  Now that we know how to frack, hopefully it wont pull a 2008 and go to $150.  Last time it was over $80 (for WTI) was Nov 2014.  Only $1 away now
The other dynamic is the status of Iran.  When Obama cut the deal with Iran, Crude bottomed at 26.05 in February 2016.  I was writing puts and owning near and deferred futures at the time.  The monthly roll was a killer.
A renewed deal with Iran looks unlikely for awhile.  So could we see $100?  easily.  $120?  Sure.  $150?  God I hope not.  But if we do, high rices will be the cure for high prices.  Even the ESG types wont be able to resist or stop investment at those prices.
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