A Summary of My Post-CPI Tweets
Below is a summary of my post-CPI tweets. You can follow me @inflation_guy. And, given where all of this seems to be going…you ought to.
- Core inflation only up 0.122%. But housing continues to accelerate! Apparel -0.5% this month.
- Core dips slightly to 1.734% from 1.766% y/y. At odds with our forecast, due to the continued weakness in core goods.
- Still think core ends 2013 over 2%, but depends on core commodities coming up some. Our housing forecast looks good.
- Primary Rents stays at 3%, OER at 2.2%.
- Medical Care 2.4% y/y from 2.3%. And that’s with “health insurance” falling to 2.5% from 2.9%. Obviously, that’s all pre-ACA.
- Accel Major groups: Medical Care (7.2%). Decel: Apparel, Recreation, Educ/COmm (16.3%). Everything else sideways.
- This really IS mostly about the apparel decline. Bad back-to-school adjustment probably.
- I think given apparel, what we know will happen in medical care, and the housing stuff…next month may be over 0.3% on core.
This has all the signs of one of those numbers (and we’re seeing a lot of them this month) that should be averaged with next month’s number because of data collection quirks. Actually, we probably ought to average September, October, and November data together to get a “before, during, and after” average around the government shutdown. The apparel decline hit women’s apparel, men’s apparel, and girls’ apparel, but boys’ apparel inflation accelerated. Medical care prices re-accelerated slightly, as I think is destined to happen because the current run-rate is significantly due to the effect of the sequester on Medicare reimbursements, but we can already see that the “insurance” category is going to be accelerating markedly in the next few months because of the large number of cancellations and re-policying that is going on around the implementation of Obamacare. While direct consumer purchase of insurance and/or medical care is just a small part of overall inflation, a big jump will still be felt in the overall data.
The key conundrum continues to be the softness in core goods, but as I’ve argued previously the biggest part of the effect is from the very low readings from medicinal drugs and medical equipment – both of which accelerated this month. If the apparel reading really is a quirk, then core inflation is going to start heading higher with alacrity now. All of the “interesting” parts of it already are.
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Could you kindly explain why there is such a disconnect between CPI and house pricing measurements?
Sure. When you buy a house, you get two things: an investment in an asset, and a consumable service (a place to live). Prior to the early 1980s, the BLS mistakenly considered housing costs to be both of those things, but since a homeowner can always rent rather than buy, it is clear that the cost of HOUSING as opposed to the cost of HOUSES is better measured by rents than home prices.
You can see this with the following hypothetical. Option 1 is to buy a home and live there. Option 2 is to buy a house, rent it out, and then rent an identical house in which to live for one year. These are strictly equivalent – in both cases you have one year of shelter and in both cases you own a home. But option 2 makes it pretty clear what your cost of actual shelter was, because you paid for it explicitly. You also had an asset gain or loss based on the change in the home price plus the rent you received (abstracting from maintenance).
That’s the way the BLS looks at shelter costs, and I think it’s the right way.
What happens over time is that increases in home prices are either driven by increasing rental yield (like P/E for stocks) or by increases in rents themselves. Big increases in home prices, or big decreases, as we have seen over the last decade are driven more by changes in rental yields than by changes in rents. They move together, but rents move much more slowly.
Thank a lot