Inflation details

https://www.bls.gov/cpi/

In March, the Consumer Price Index for All Urban Consumers increased 0.4 percent, seasonally adjusted, and rose 3.5 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 3.8 percent over the year (NSA).

Wells Fargo has a good analysis with charts.
https://wellsfargo.bluematrix.com/links2/html/ee8a4886-9b54-4330-9053-e0f301db1c5a

The Cleveland Fed Inflation Nowcasting shows both CPI and PCE inflation.

The CPI is used to adjust TIPS and I-Bonds while the Fed prefers to analyze PCE inflation.

Even so, a high CPI reading like today’s together (pushed by high core services inflation) with strong hiring numbers last week will reinforce the idea that the Fed does not need to cut the fed funds rate.

The options market has suddenly dropped the probability of a rate cut in June to 16%. Last week it was 50% and the week before 66%. Majority opinion has shifted to September.

USD suddenly popped. It’s a little early in the day to look at the Treasury yield curve but the 10 year Treasury yield suddenly rose above 4.5%. SPX and NAZ dropped over 1%.

The markets did it again – ran ahead of the facts and the Fed and had to retrench.

Wendy

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I just got off the phone from telling my local banker to roll an expiring 7 month, 5% cd into another 7 month, 5% cd. 7 months ago he suggested that I look at a longer term cd yielding less on the theory that rates were headed downward. I declined. This is my third consecutive bet on sticky inflation and higher rates. At some point you place your bets and take your chances.

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According to one analysis I just read, remove the “imputed rent” from the calculation, as nearly every other advanced economy does, and inflation is about 2.3%. Imputed rent is rent you don’t pay, and is a guess as to what you might pay if you did pay it which you don’t. It’s very weird that it’s in there in the first place - when it’s actually the last place; it’s a terribly lagging indicator which distorts the figures pretty dramatically (up to 33%, and it’s just flat wrong most of the time, except when the horizons are crossing between “going up” and “going down.”

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How do they account for the cost of housing in their inflation calculations?

Hey, he IS trying to borrow more money at lower rates–by paying YOU less.

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Pops you are doing well because inflation generally is not a problem. Excluding Florida real estate and to a degree gasoline.

The EU, for example, includes only the actual cost of rent, not a theoretical cost of rent (since no one pays that.) That moves the weight of that cost to 7% of their figures, in the US it’s nearly 33%.

This is from an extract arguing that it should be included, although I don’t think so. The cost of housing should be calculated by the actual cost of housing, ie. “Home prices”, but not by pretending you’re paying rent, because your mortgage payment doesn’t actually go up as inflation increases.

In Japan, housing is 21% of the index (*again: 33% in US).

If you buy a house and have a mortgage (or don’t), do you feel it when rent costs go up? If you salary is tied to a COLA agreement, you’re getting an increase in pay without a commensurate increase in costs. This just seems wrong: it continues pushing up costs, even though they are fictitious.

Although I have looked I have not been able to find what percentage of CPI stats reside in “housing” in either China or India, except that it is not calculated in the same ways as in the US.

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Home insurance in these readings matters as well. Might factor in as much smaller but it is very high right now.

Just a little thought…higher shelter inflation is pumping up higher insurance rates.

Wow, it’s really nice for the folks in the EU that they only spend 7% of their money on housing. No wonder they can afford to sit and relax in cafes so much! :rofl:

In that case, the same should apply to TVs and Washing Machines. Since you’ve already bought a TV, it doesn’t cost you any more today, so any increase in the price of TVs shouldn’t be accounted for in the CPI calculations.

Basically the argument you are making is that only things that are purchased regularly (food, energy, insurance, rent, entertainment, tuition, etc) should have higher weight in the CPI, all the other things that are purchased less frequently (homes, cars, consumer durables, etc) should not have much weight in it. This despite the fact that those durable items that people buy infrequently often consume more of one’s money than the items purchased regularly do.

The reason many people might believe this is because it’s hard to look statistically across a large population when what you are most familiar with is your own personal situation and expenses. Invariably people say “but my …” in inflation discussions (yes, even you and I have done it). But a number like CPI is meant to average across the whole country, and that makes it exceedingly difficult to calculate. And that’s why odd constructs like OER are used. Now, don’t get me wrong, I have my own issues with OER, but that’s because I would prefer some other measurement that “spreads” the cost of housing across some period that makes sense, even though I don’t know what that measurement or what that period should be.

If they used “the actual cost of housing”, then we easily would have shown double-digit inflation at some points in 21/22, and that would have caused even more panic than we experienced from the high numbers. Instead the OER construct “smoothed” the numbers out somewhat, and we are seeing the tail end of the return to normal now.

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That’s the not the argument. The argument is that most people have leases or mortgages which are fixed. But the inflation rate is based on the imputed value of rent which not what home owners actually pay. So if you aren’t paying more, did inflation increase?

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I haven’t thought this one through, but inflation calculations must take the entire population into account. If your home is appreciating in value it has to be accounted for somehow because home buyers will be paying more as prices go up, and home sellers will be getting more, and taxes will go up, etc.

I think I agree that people who already own their home can control their ‘personal inflation’ , but you can’t ignore rising home values just because people who already own homes can choose not to sell.

My property taxes and property insurance costs keep going up as the property’s assessed value rises, even though I “own” my home… Plus as my home ages, it needs repairs and replacement parts. Those aren’t getting any cheaper. My household budget has a line item for “taxes and insurance” and another one for “repairs and maintenance”, and neither one of those line items have a major surplus in them. In fact, next month the tax bill will be mailed and my insurance will renew.

Based on what’s visible on my country auditor’s web site and what I’m hearing from neighbors who’ve had their insurance premiums renew recently, I’m working to figure out what I can deprioritize to cover those bills.

Fortunately, it’s a question of which savings priority will be deferred. Of course, I also just sunk nearly $3,000 into a car that’s not worth much more than that, because “replacing the 2003 Accord” is the priority that seems to be the least ugly one to defer.

Regards,
-Chuck
Home Fool

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Right. But those things don’t effect your imputed value of rent because rent is determined on the open market, not what your costs are.

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Except that those are still very real costs that need to be paid “in lieu of rent”. When I rented an apartment, my only obligations were the rent, utilities, and my very tiny renter’s insurance (that ended up being essentially “free” by bundling with my auto insurance).

The property taxes, property insurance, property maintenance, and property repairs were the landlord’s responsibilities, and if the landlord didn’t charge enough to cover those costs, it wasn’t my problem.

You can’t hand wave away those costs that homeowners directly pay that renters don’t directly pay. Indeed, according to the BLS, things like property taxes are “indirectly included” in housing costs through that owners equivalent rent number ( https://www.bls.gov/cpi/questions-and-answers.htm , question 14). For some even more fun reading, also see this link on how many home owner costs aren’t directly included in CPI: https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htm .

You can make the argument that owners’ equivalent rent isn’t the best way to measure those costs, but it seems to me to be a better way to estimate them than to ignore them all together and pretend like they don’t exist…

Regards,
-Chuck
Home Fool

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That’s not what it says. It’s that only 7% of inflation is attributed to housing. Ask the question: if you buy a house, either with a mortgage or without, does your cost of “rent” increase every year? No?

(Yes, other costs may increase, your property taxes, perhaps maintenance, but otherwise the base cost is the same year after year. Why should the overall calculation of inflation for everyone include a fictitious cost which you don’t pay?)

(Let’s take it a step further: the UAW bargains for COLA in their contract. Well, COLA is calculated on the fictitious “rent increase” that is baked into this number, so it actually increases wages more than the actual rise in inflation. That, of course, pushes actual inflation higher, leading to round 2. Lather, rinse, repeat.)

I don’t know what the correct methodology is, but including a cost which isn’t an actual cost doesn’t seem to be the right way to approach it.

But that is exactly how it works for other hard goods, including cars, washing machines, TVs, etc. Inflation stats look at the increase in cost for new purchase , not some theoretical cost you (don’t) pay for using your 5 year old TV. Housing costs, it seems, could follow that model: use actual housing costs (rents and housing price increases for similar square footage & amenities, nationalized to account for geographic differences). Why would this be bad?

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It would not directly be an inflation report but home values in the US determine spending through the refinancing of debt. That varies with the times.

If we travel back to 1999 the current method might be more on target.

Currently, it is way off target. In 1999 the current method was still wrong. Just everyone was refinancing credit card debt. It is a poor methodology all around.

The other matter corporations use CPI as an excuse to raise prices. You’d be taking that away to an extent. You are dooming some of the profits. LOL

That was a sarcastic comment. I knew I should have explicitly labeled it as such! My point via that comment was that if housing comprises 18% of total expenditures, and you only weight it as 7% in the inflation calculation, then over the years you will constantly be underweighting it.

Like I said, I am no fan of OER, but the folks who’ve been measuring CPI over the years are pretty smart, and know more about it than we do. They’ve analyzed the situation for decades and so far haven’t come up with a better way.

I strongly suspect that had they been using “actual housing costs”, and in 2021/22, we would have seen inflation up in the double digits, there would have been people (perhaps including you and I) that would decry the numbers and say “but these are transitory effects and won’t last, they really should have a better way to calculate the numbers with some sort of smoothing over time, because people don’t all seek new shelter at the same time!”

They don’t actually look solely at increasing or decreasing cost. They also adjust by capability, a TV that didn’t support HD was valued differently than a TV that did support HD, notwithstanding the actual price in dollars and cents, see “hedonic quality adjustment” for more information about that. I can’t imagine how they would do that for housing, it would be a huge effort with all sorts of odd, and sometimes wrong, assumptions. For example, let’s say they were to use “age of house” as a hedonic deflator of value. In some areas, that might be very reasonable, after 50-60 years, many houses begin to deteriorate so much that they eventually become unusable, so you could perhaps deflate their value by 1% a year for the last 30 years of useful life, and assume the remaining 70% is land value. But in some areas, land value comprises 70% and in other areas only 50%, etc. That all needs to be accounted for to have accurate measurements. Then you have the scenario where older houses become worth more than newer houses because the area is so desirable that people are willing to spend lots of money renovating and maintaining those houses. And then a whole other can of worms, how do you account for the accumulated value of renovations? The actual labor and materials of the renovation itself was included in “Services - construction”, and in “Construction material” of the CPI, but the resultant increase in value, if any, hasn’t yet been included in the CPI calculation. Not to mention that some renovations (new fancy kitchen, additional rooms, a new garage, etc) add real value to a home, while other do not (adding a pool, minor kitchen remodel, new fixtures, etc). It becomes way too complicated and might lead to double counting no matter how you adjust things (especially during a “shock” like COVID where suddenly everyone stays home and stoms moving houses as much, and everyone does all sorts of renovations). Maybe they determined that OER is the easier, more all encompassing, way of accounting for all of it? I don’t know.

The advantage in this situation it creates inflation instead of deflation. It creates profits and capitalizes corporations. That is a great thing.

If you look at the CPI chart some items are in deflation. We need inflation. It has to be moderate inflation.

This is well studied and known in economics classes.

Not quite. If the “value” of your residence goes up, so what? You are not paying more for it. Plus, if you choose to sell, you will move to someplace else–and then have to pay more to buy the new place AND pay even more to have your “stuff” moved from the old place to the new place. And, once you bought the new place–no price increases until you move again. And the cycle repeats until you move into the nursing home/wherever. So, does the inflation figure include the rapidly spiraling cost of medical care facilities? If so, then inflation is way over the posted figure–or do they carefully omit that amount?

That would be captured in “resale price.” If you have made significant improvements to the house, say, a swimming pool (controversial, i know) or a patio or a new garage or whatever, that “adjustment” will be shown at the time of sale. (Yes, you will be living in a “better” house, but you have presumably paid for it so part of it would be captured in construction materials, construction labor, etc.)

Like a TV set that now does Wi-Fi, or a car that now has power windows, those improvements are invisible except in the sale price. Why should housing be different?

Like I said, I am no fan of OER, but the folks who’ve been measuring CPI over the years are pretty smart, and know more about it than we do.

I could say the same for the countries in the EU, or Japan, or others that use different methodologies. I don’t think the “deferral to authority” argument works in the face of fictitious accounting.

I strongly suspect that had they been using “actual housing costs”, and in 2021/22, we would have seen inflation up in the double digits, there would have been people (perhaps including you and I) that would decry the numbers and say “but these are transitory effects and won’t last

On this we agree, except the housing prices have proved to be sticky.

In some areas, that might be very reasonable, after 50-60 years, many houses begin to deteriorate so much that they eventually become unusable, so you could perhaps deflate their value by 1% a year for the last 30 years of useful life, and assume the remaining 70% is land value. But in some areas, land value comprises 70% and in other areas only 50%, etc. That all needs to be accounted for to have accurate measurements.

Sure. And how do we do this, except by guessing? My way - by actual sale prices - captures this information according to the market, not some remote accountant’s guess, or a homeowner estimating what he thinks he might pay in “equivalent rent.” Frankly, should I get that phone call I’d say “I have no earthly idea” and hang up.

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