When will CPI Shelter fall to pre-pandemic levels? The Zillow Rent Index (YoY) is a leading indicator, and it has returned to pre-pandemic levels (annual change). This took about 18 months. CPI Shelter (YoY) might return to pre-pandemic levels around September 2024 (18 months after the March 2023 peak).
If this happens, it will decrease CPI by 1.2%. CPI is now 3.2%, and might drop to about 2% in September 2024. CPI might drop to 2.5% in May 2024, and this might be low enough for the Fed to cut interest rates.
Details: CPI Shelter inflation is now about 6.7%, with a pre-pandemic level about 3.3%. Relative Importance of Shelter in CPI is 34.9. This could cause CPI to drop by about 1.2%.
(6.7-3.3)*0.349 = 1.2
US - Rent CPI vs. Zillow Rent Index
Other items might increase or decrease inflation. Inflation can be surprising.
Expenditure category (2023)
Relative Importance
subRI
Food
13.4
Food at home
8.6
Food away from home
4.8
Energy
7.2
Energy commodities
3.9
Energy services
3.3
Commodities less food and energy
21.0
Transportation commodities less motor fuel
7.5
Household furnishings and supplies
4.3
Apparel
2.6
Recreation commodities
2.2
Medical care commodities
1.5
Other goods
1.2
Education and communication commodities
0.9
Alcoholic beverages
0.8
Services less energy services
58.5
Shelter
34.9
Medical care services
6.3
Transportation services
6.0
Education and communication services
4.8
Recreation services
3.1
Other personal services
1.5
Water and sewer and trash collection services
1.1
Household operations
0.9
data from Table 2. Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by detailed expenditure category, October 2023
As a longtime homeowner, shelter inflation only impacts me (very marginally) via property taxes.
Less than 10% of all citizens move annually, and less than half of all people rent so shelter inflation has a disproportional impact on a very small subset of the populace so it would make sense to be able to view inflation without it.
I also think it would be beneficial to view inflation without education for much the same reason.
To project CPI, divide a hard task into simpler ones. Making projections for Shelter CPI separate from the other categories is one way to approach the task. Shelter CPI is easier to project than overall CPI, and is a large part of CPI.
The Fed dot plot is getting updated on Wednesday. The September report projects PCE inflation at 2.5 in June 2024, and rate cuts to begin in 2024.
current PCE inflation: 3.0
median projection of PCE inflation in June 2024: 2.5
median projection of PCE inflation in June 2025: 2.2
median projection of PCE inflation in June 2026: 2.0
current Fed target range: 5.25-5.50
Midpoint of target range 2023: 5.625
Midpoint of target range 2024: 5.0
Midpoint of target range 2025: 3.75
Midpoint of target range 2026: 2.625
data from:
FOMC Summary of Economic Projections, September 30, 2023
Personal Consumption Expenditures: Chain-type Price Index (PCEPI)
CPI is weighted based on total U.S. spending in the past 2 years. (The government somehow knows how much is spent on bacon and eggs.) Inflation is a general increase in prices. Specific categories might see different price changes: either price drops (smartphones) or price hikes (airfare).
Smartphones, used cars and bacon: 10 things with the biggest price drops in 2022, despite inflation, Jan 18, 2023
School lunch, eggs and airfare: Why inflation soared for 10 items in 2022, Jan 13, 2023
But its applicability to everyone is not a good use for it–unless one is meaning everyone generally buys and uses the same range of products (which is not true).
As a college dropout it’s amazing how much one can learn out of school. It was possible before Google with books, magazines, and encyclopedias and with Google now one can learn on steroids.
I used to subscribe to several magazines including Scientific American. Martin Gardner was one of my favorites, he even answered one of my letters about Pascal’s Triangle! I had discovered something about it he had never heard of.
It’s been a long time. Not too long ago I read a Scientific American article online and it read like pure crap. I have since then discovered that the magazine was sold. Now it’s modern woke/cancel trash.
Tread carefully, watch where you tread, the future is not like the past.
But that’s exactly what these measures of inflation (CPI, PCE, and others) are for. They are for looking at general inflation - inflation that is roughly the average of what all people see individually.
When the Fed attempts to push inflation one way or another, they push it for the whole country not just one segment or another. Their policy tool affects everyone so they have to look at the broadest measure of inflation. (Personally, I wish they would smooth the highly volatile portions such as energy, rather than look at PCE or CPI without energy.)
It is Congress that has a bit finer control over portions of the economy. We talk about fiscal policy as a whole, but inflation in different parts of the economy can be affected by how exactly the fiscal policy is implemented. Spending money to subsidize thing-a-ma-bobs will affect that one item or area far more than it affects other areas. Taxing left-handed-smoke-shifter users affects them more directly than it affects right-handed-smoke-shifter users and those who don’t use a smoke shifter at all.
No, but nice try. Each one measures different things. Each one is, by itself, not appropriate for other uses. CPI is for the overall economy–defined as what?
From BLS:
“The Consumer Price Index (CPI) is a measure of the average change overtime in the prices paid by urban consumers for a market basket of consumer goods and services.”
So CPI is a city-oriented program aimed at estimating the cost of items bought by residential urban dwellers. So primarily homeowners and similar people of working age.
Elderly CPI:
"The Consumer Price Index (CPI) for Americans 62 years of age and older is a research price index called the R-CPI-E. It is used by researchers, news agencies, and some companies. The index is based on the spending patterns of the elderly. It takes into account differences between the elderly and the rest of the population in the goods and services purchased, the geographic areas in which they live, and the types of stores they patronize.
The CPI-E was launched in 1983. It is determined by the BLS. The 2022 annual CPI was 876.664 and the rate of inflation was 8.00%.
The cost-of-living adjustment (COLA) is determined by the percentage increase, if any, between the average 3rd quarter CPI of the current year. In 2023, retirees received an 8.7% COLA to their Social Security benefits, the largest increase in 41 years."
CPI-U now represents about 87 percent of the total U.S. population. CPI-W population represents about 28 percent (hourly wage earners). CPI-W closely tracks CPI-U. (Social Security COLA is based on CPI-W.)
Consumer Price Index for All Urban Wage Earners (series starts in 1913) (CWUR0000SA0)
Consumer Price Index for All Urban Consumers (series starts in 1947)
ratio is:
Are rural prices somehow different? Small changes in weights isn’t going to affect CPI much. Gas use is probably higher in rural areas, but gas is only 3.3% of CPI-U. If rural gas use is double (6.6%), it would only change the CPI weight from 3.3% to 3.7%.
I’m not sure why CPI is based on surveys representing only 87% of the population. It has long been recommended to broaden the index to represent the entire population. But broadening the index probably wouldn’t change CPI much. Walmart and Amazon are everywhere.
R-CPI-E also closely tracks CPI-U. The ratio of the 2 indexes was about 1.02 in 1982, 1.08 in 2008, and 1.09 now. A 7% increase over 41 years is about 0.2% per year, but most of that change happened before 2008.
Research Consumer Price Index (series starts in 1982) (CPIEALL)
Consumer Price Index for All Urban Consumers (series starts in 1947)
Again a fundamental misunderstanding. An index is inappropriate for ALL individuals, not just those who are outliers. An index has nothing to do with an individual, it only has to do with a population. Think of it this way - would an index of a single stock have any meaning or usefulness at all? No. So too with an inflation index, it is meant to measure the average across an entire population, or various populations as the case may be, but always across a large number to get a meaningful average.
I have a similar history: going from “free” employer paid health insurance to buying my own. Add in some extra bills from aging, and medical is one of my biggest expenses.
Employer paid health insurance premiums are not used in weighting CPI. But they are in PCE. PCE tracks personal consumption expenditures, while CPI-U tracks personal out-of-pocket spending. PCE has grown slower than CPI-U by about 0.4% per year since 1959. A Fed target of 2.0% PCE might translate into 2.4% CPI-U.
=== links (for more information) ===
Differences between the Consumer Price Index and the Personal Consumption Expenditures Price Index
“the expenditure weights for medical care services in the CPI are derived only from out-of-pocket expenses paid for by consumers. By contrast, medical care services in the PCE index include those services purchased out of pocket by consumers and those services paid for on behalf of consumers—for example, medical care services paid for by employers through employer-provided health insurance”
Personal Consumption Expenditures: Chain-type Price Index (PCEPI) (series starts in 1959)
Consumer Price Index for All Urban Consumers (CPIAUCSL)
No, I understand it perfectly. CPI-U is an index based on urban workers. Which is why it is specifically labeled “CPI-U” by BLS. Choosing to use it to cover other groups (who are not “CPI-U”) distorts the outcomes for those other groups. Generally, CPI-E will have a significantly greater allocation of expenditures for a wide range of medical care. Maternal related expenses would be zero as they are past child-bearing age.
