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CPI for CPI's Sake?

Now that the pandemic era is well and truly in the rear view mirror, it's time to assess where we are in the economy as it stands now and plot a way forward.

Surely the pandemic has played with the national psyche in ways we have not even explored. To use the vernacular, it's messed with people's minds. There seems to be a good deal of unhappiness out there as to how the economy is doing, a lot of it I believe, driven by constant media scrutiny, which magnifies even the smallest issues into full blown crises.

So even as job creation has been spectacular, and the consumer healthy, people are miffed at elevated prices, even though at this point, they appear to have stopped rising. Having lived through all of the economic booms, busts and episodes over the course of my own life, I still maintain that the current round of inflation is more of an irritant than a calamity.

Consider this excerpt, framed as a catastrophe. This is what passes for anguish for the American middle class, and its presented as straight reportage.

For all of the complaining, if a 10% rise in the cost of a box of Cheerios puts you over the edge, chances are you weren't doing too well anyway. And if that's the case, that opens up questions about what kind of economy we have in the first place. But right now, the United States is doing better than anyone.

There are other issues afoot that policy can't fix in the short term and may be with us for perhaps another decade. Housing costs, where prices have been driven up due to severe underbullding and strict local zoning regulations, won't see much relief for young people, who are already under some strain from student loans. This is a true crisis.

Fed policy may have exacerbated this, and some observers, myself included, noted that the Fed, by driving interest rates up, may be driving CPI's most heavily weighted component to new heights even as they try to bring the overall number down. The fact that millions of homeowners have sub 4% mortgages and have no incentive to relocate has also played a big role in freezing up existing housing inventory. Listings have plummeted.

More of a constant irritant is the manner in which CPI counts for shelter inflation. By using "Owner Equivalent Rent," it's exaggerated actual inflation. Small wonder CPI never captured home price increases as measured by say, the Case-Schiller Index. Another factor is demographics. Millions of homeowners have NO mortgage as they have aged into their dwellings.

Higher rates have grossly distorted the commercial real estate housing market as well as residential. As Starwood Capital's CEO Barry Sternlicht noted on a recent conference call, "This isn't working."

Which brings me to an odd dynamic I've been seeing for months. There are serious economists out there, people I respect and have followed for years, who are practically besides themselves with glee over things like the prospect of declining used car prices, which is a CPI component. Good news is good news right? Even if you don't own a car, I guess. People are cheering for a lower headline number that isn't going to change anything materially for most people.

Every 10 cent move in the price of gasoline is greeted with either elation or a dark foreboding, even though in real terms, gasoline has practically never been cheaper or your car less efficient. As far as your economic fortunes are concerned, the price of gas should be an afterthought. To hear all the crying, you would think another $5.00 a tankful sent millions to landfills foraging for dinner. But a five mile drive down the boulevard will expose the consumer to dozens of instant price signals. And here too, media obsession plays a role in shaping consumer sentiment.

Please look at this research from Briefing Book.

"The plot shows that very few TV programs mention gas prices when the nominal price is below $3.50 per gallon. Above this level, TV mentions of gas prices ramp up linearly..."

But it shows how the inflation dialogue has morphed over time. Too much scrutiny over things that don't matter, too much Fed commentary produced by the bucketload when rate policy is useless against things like rising home insurance prices or commodity disruptions.

More to the point is the absurdity of hanging on with bated breath for each new inflation metric, to tell us something that's already happened. Whatever the number is, do you feel any different?

The alarmist commentary isn't limited to inflation. Bloomberg ran an article crowing about more homes being "underwater" on their mortgages. It turns out that  the number of additional homeowners at negative equity is just 2500 more over the course of a year, across a dozen states. That's not a "news" story. It's not even a footnote.

In any case, if we're seeking to enhance our sense of eudaimonia and social stability, it's time to move past current talking points and into areas that matter, that affect the lives people live. There's more to this than the price of chicken wings. And we're not seeing it.

Some things can be fixed. Some we're just going to have to live with. It's time for a new conversation.

May 11, 2024


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