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Why Did Economists Blow the CPI Forecast So Badly This Month?

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35 comments on Why Did Economists Blow the CPI Forecast So Badly This Month?

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CPI data from the BLS, chart by Mish

Bloomberg Economist Expectations

  • CPI M/M: 0.7% Expected vs 1.0% Reported
  • CPY Y/Y: 8.2% Expected vs New 40-Year High 8.6% Reported
  • CPI Excluding Food and Energy M/M: 0.5% Expected vs 0.6% Reported
  • CPI Excluding Food and Energy M/M: 5.9% Expected vs 6.0% Reported

It was a clean miss economists undershooting inflation in every estimate.

Spotlight Shelter

The shelter index is a whopping 32.44 percent of the CPI. So despite the fact that it is only up 5.5% year-over-year, the jump contributed an outsized percent to overall year-over-year inflation.

I have been warning about this for a couple of months.

How Far Behind the Curve is the BLS and Fed on Rent Inflation?

National Rent data from ApartmentList, OER and Primary Residence from the BLS, chart by Mish

On June 2, I asked How Far Behind the Curve is the BLS and Fed on Rent Inflation?

Those red and blue dashed lines were my projections on June 2. Owner’s Equivalent Rent (OER) and Rent of Primary Residence are severely lagging National Rent Prices. 

OER is the mythical price one would pay to rent one’s own house from oneself, unfurnished, without utilities.

I commented “There will be upward pressure on rent in the CPI for the next three to six months.“

CPI Percentage Weights 

CPI Percentage Weights from BLS, chart by Mish

Percentage Weights May 2022

  • OER: 23.78%
  • Rent of Primary Residence: 7.28%
  • Energy: 8.26%
  • Food at Home: 8.30%
  • Food Away from Home: 5.12

The numbers change slightly every month. Also, the shelter index is a bit higher than Rent plus OER. 

CPI Month-Over-Month OER and Rent 

CPI data from BLS, chart by Mish

OER and Rent both jumped 0.6 percent month-over-month. Those are big jumps given their weight in the CPI. 

CPI Month-Over-Month Percent Changes 

CPI data from BLS, chart by Mish

Food was up 1.1 percent for the month and shelter 0.6 percent but the latter had a far bigger impact on the overall jump.

Percentage Contribution to Monthly CPI 

CPI data from BLS, calculations and chart by Mish

CPI Energy Month-Over-Month 

CPI data from BLS, chart by Mish

Energy was the single biggest reason for the jump in the CPI but I suspect economists mostly got that correct. 

Inelastic Items

Much of the CPI is totally inelastic, especially food and rent. 

The Fed can impact leisure driving but not driving to work except at the cost of jobs. 

Moreover, the Fed cannot impact poor energy decisions by the Biden administration.

For discussion of the administration’s role, please see Why Are Energy Prices High? Blame President Biden

That does not imply Biden is solely responsible but he is largely responsible especially on sanction policy and regulations. 

Regarding sanctions, I am confident Trump would have made the same mistakes but he would not have made the other regulatory errors. 

Looking Ahead

This post originated at MishTalk.Com.

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35 Comments
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Oldest Most Voted
Denver1
Denver1
4 years ago
“How fast can the Fed destroy demand” It’s the SUPPLY that is being destroyed by the day. The Beltway (Executive orders to stop drilling and pipelines in US and destroy Russia) and Brussels (demanding all electric cars by 2035 and stopping all Russian energy exports) are destroying energy SUPPLY and it’s underlying investment. Energy demand will continue to outstrip supply as supply collapses at higher and higher costs.
Hope springs eternal the collapse will finally bring trillions of profits to the thousands of Hunter Bidens roaming the world looking to hype and exploit corrupt ideas.
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SleemoG
SleemoG
4 years ago
“Why Did Economists Blow the CPI Forecast So Badly This Month?”
Because economics is a religion and their goat entrails misinformed them this time.
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Tony Bennett
Tony Bennett
4 years ago
“Why Did Economists Blow the CPI Forecast So Badly This Month?”
…
Groupthink
Not just this forecast, but many. For several reasons.
1) Herd instinct. If you go out on a limb and wrong? Career over. Stay with the herd and wrong? “No one saw this coming”. Career moves along. Best to stick with “official” narrative.
2) Economists are all pretty much the same stripe. I read an interesting article during the GFC on why economists missed everything so badly. Author made keen observations on the making of an economist. To be SOMEBODY you need to be published. In peer reviewed journals. To get published (and to get the sweet gig as professor of Big Shot school or economist at a Big Bank / Foundation) you better stick to official narrative … or your article goes to the circular file.
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Maximus_Minimus
Maximus_Minimus
4 years ago
Reply to  Tony Bennett
3) Never have to prove your theory. Have you ever heard of eco-towns where a certain econ theory is tested?
In any reputable science, getting your peer-reviewed paper, or being asked to peer review a paper, is already a mark of success.
Then someone has to repeat it.
Nutritional science compared to econ is a hard science (riddled with sponsorship bias).
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Christoball
Christoball
4 years ago
Zelensky is in the Eye for an Eye stage of spirituality. When he is transformed into the forgiving seventy times seven stage of spirituality he might end up being part of the solution rather than the problem.
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Naphtali
Naphtali
4 years ago
The USA is overwhelmed with experts these days. Interestingly, this abundance seems to not produce much in the way of expertise.
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Jackula
Jackula
4 years ago
Corrupt politics! Just like why polls are much less reliable in the last decade. Real inflation is actually hotter. I am not in the camp the FED is over-reacting now. I think they are under-reacting until interest rates are up a couple of hundred more basis points. There is a lot of pent up inflation in the food chain and Putin knows he has the upper hand because of the damage this war is doing to the western economies, he will be in no hurry to deal, meaning here in Cali $8-$10 per gallon gas by August.
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Robbyrob
Robbyrob
4 years ago
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Cocoa
Cocoa
4 years ago
The Trump admin would have continued Keystone, expanded domestic production, not piss off the Saudis over journalist deaths and stayed out of Ukraine. The Ukraine alone, Biden has created more problems because neoliberalism insists that the US/West are the only superpowers left. He probably would have cut the Covid nonsense short as well.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  Cocoa
Trump would have given Europe away to Putin for nothing. Trump was a terrible negotiator because he literally got nothing from Russia, North Korea or anyone else except people staying at his hotels and buying stuff from his businesses or securing deals for the Trump family in the future. Trump is as much to blame for the mess we are in because he let autocrats like Putin flourish for 4 years without any consequences.
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radar
radar
4 years ago
Reply to  Casual_Observer2020
Keep your friends close and your enemies closer, that’s the rule Trump lived by.
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RonJ
RonJ
4 years ago
Reply to  Casual_Observer2020
McCain meddled in Ukraine.
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Zardoz
Zardoz
4 years ago
Wishful thinking.
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Dr_Novaxx
Dr_Novaxx
4 years ago
Why? I think they’ve all been drinking the Kool-Aid.
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Pontius
Pontius
4 years ago
Interesting. As Rummie once famously espoused, paraphrasing: the known known, the known unknown and the unknown unknown. Housing prices already starting to roll over (monthly payment twice from two years ago). Housing data, as you suggest, is delayed by a few months. Fed pressured and forced to overreact to tardy CPI hot prints and surprises with draconian hikes dimwittedly causing severe recession? Buy bonds?
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Mish
Mish
4 years ago
Reply to  Pontius
Good Observation
The subject of a Tweet I was in
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shamrock
shamrock
4 years ago
Shelter was up 0.6% and overall up 1.0% month over month. Meaning CPI ex-shelter was up 1.2%. The shelter component is keeping overall inflation lower.
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Mish
Mish
4 years ago
Reply to  shamrock
Wrong!
Shelter contributed 18.67% to the rise
Food Contributed 15.75% to the rise
Energy contributed 32.23% to the rise
How does contributing to the rise keep inflation lower
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shamrock
shamrock
4 years ago
Reply to  Mish
Well, imagine shelter was 100% of CPI, the monthly print would have been 0.6%, not 1.0%. If shelter was 0% of CPI the monthly print would have been 1.2%.
So shelter contributed 18.67% of the total 1.0% that’s true, but the weight is 32.7%. It contributed way less than it’s weight. Thus, it’s keeping inflation lower.
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Jack
Jack
4 years ago
Reply to  shamrock
Agree – this is a flaw in this post.
The shelter figures presented had a lower rate of increase than ex-shelter figures.
Good thing that shelter rates of inflation have stayed relatively lower – which has kept overall inflation rates lower.
Shelter does contribute most to overall CPI – has a higher influence – but in this case it kept inflation down.
Unfortunately I find this simple math concept not well understood by a lot of folks – they cannot see the difference.
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shamrock
shamrock
4 years ago
Reply to  Jack
Thanks, well said. It is a pretty simple concept. Maybe if I was more precise and said shelter lowered the “inflation rate” instead of “inflation”. Those 2 things are synonymous in my mind but maybe other people think they are different.
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Matt3
Matt3
4 years ago
Economists missed it because they suck at their jobs. They are detached from the economy that most people live in.
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michiganmoon
michiganmoon
4 years ago
Reply to  Matt3
Perhaps they have an incentive to encourage people to spend and invest.
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Karlmarx
Karlmarx
4 years ago
Reply to  Matt3
“Economists” are just a select group of bank economists. There is so much group think among this bunch that “economists” is really just one economist in many bodies.
The complete lack of independent thought among the group of orthodox economists is one of the main reasons we are in this mess.
Though that said, my own non-keynesian forecast was for just 8.3 because we were working from a higher base. Mea culpa
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Casual_Observer2020
Casual_Observer2020
4 years ago
This is why half measures don’t work when it comes to intervening in war. You either go all in or stay out. The US and Europe saw this coming but did nothing in January. They could have easily sent ballistic missiles to Ukraine and pointed them at Russia. Instead we gave Putin what he wanted. Namely higher energy prices via sanctions.
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Matt3
Matt3
4 years ago
Reply to  Casual_Observer2020
The US and Europe could have begun negotiations early and continued negotiations rather than escalating the conflict at every opportunity. We have sanctioned ourselves and created economic problems for most and famine for some. On the food side, we are only at the beginning. When food is scarce, countries become less stable and more violence occurs.
We still have the opportunity to reverse the strategy, find a negotiated settlement and end the sanctions. I just don’t see us doing that.
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Casual_Observer2020
Casual_Observer2020
4 years ago
Reply to  Matt3
They tried. Russia was the one that didn’t negotiate in good faith. Now word is that Putin is not going to stop at Ukraine. Which tells you he was never really serious about peace or stopping at just Ukraine. As ‘bad’ as things are in the Europe and the US, they are 10x worse in Russia.
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Jackula
Jackula
4 years ago
Reply to  Casual_Observer2020
Russia actually has the lowest debt to GDP ratio of any developed country. The sanctions hit hard and fast in Russia but the blowback on the highly indebted west could be horrific in time plus we’ve changed the world financial game rules and its highly likely a competing multipolar world will emerge with enormous consequences to the west
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Lisa_Hooker
Lisa_Hooker
4 years ago
Reply to  Casual_Observer2020
Exactly. Putin is going to sweep across Europe, through Spain and Portugal, and capture Lisbon. He wants a warm water Mid-Atlantic port.
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Zardoz
Zardoz
4 years ago
Reply to  Matt3

negotiations? Appeasement you mean. Russia was never under any threat. They have nukes. They cannot be successfully invaded.

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Jmurr
Jmurr
4 years ago
Reply to  Casual_Observer2020
Alternatively they could have reached a peace deal and security arrangement that would have addressed Putin’s concerns. That would have saved a lot of lives.
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RonJ
RonJ
4 years ago
Reply to  Casual_Observer2020
The U.S. government could simply have not meddled in Ukraine in 2014.
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JackWebb
JackWebb
4 years ago
Economists are terrible predictors of these kinds of numbers, and always have been. The basic reason is that economics and econometrics are different. For numbers forecasts, econometrics has always been where it’s at.
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MPO45
MPO45
4 years ago
Excellent summary. Over the next few months we will have a slew of wildcards:
Will hurricanes take energy production offline?
Will Putin invade Finland or other countries? Escalate Ukraine or end it all?
Once China emerges from covid will this increase demand on energy?
Other geo-political risks? China/Taiwan?
If one or more of these things happen, inflation will head to the moon!
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Cocoa
Cocoa
4 years ago
Reply to  MPO45
Don’t forget, unlike trump, Biden is also saber rattling N. Korea too!
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