JLGutierrez
“Hot CPI” read the headlines today, referring to the 0.4% rise in the February CPI and the 3.2% year-over-year change in the CPI. My take: Inflation is running hot only if you think it makes sense to look at the year-over-year rise in nationwide housing prices 18 months ago.
If you omit that one item (which comprises about one-third of the CPI), then you find that the year-over-year change in the CPI has been less than 2% for the past 8 months.
Chart #1
Chart #1 illustrates how the BLS calculates the shelter component of the CPI. It’s almost entirely driven by the year-over-year change in the Case-Shiller National Home Price Index 18 months ago.
To explain: The blue line is the year-over-year change in home prices. The red line is the year-over-year change in Owner’s Equivalent Rent, which dominates the shelter component of the CPI, shifted 18 months to the left.
That the red and blue lines track almost perfectly for the past several years is virtual proof that the BLS is using 18-month-old housing price changes to calculate one-third of the value of today’s Consumer Price Index. It’s crazy, and it’s a well-known flaw in the calculation of the CPI.
Chart #2
Chart #2 compares the year-over-year change in the CPI and the CPI less shelter. There is a huge gap between the two, which has persisted for over 8 months.
That gap will almost certainly disappear over the next 6-7 months, since that will mark the zero % change in the blue line in Chart #1.
Given that the stock market today shrugged off the disappointing CPI news, we can reasonably conclude that the world is aware of this problem.
The world knows that inflation is under control and that sooner or later the Fed will begin reducing short-term interest rates.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
