The Bureau of Labor Statistics measures changes in housing costs in ways that change slowly and arrive too late. Studies from the BLS, Federal Reserve Banks and prominent economists find lags of 12-18 months before changes in rents and/or house prices finally get reported as higher or lower housing inflation in CPI or PCE inflation reports.
CPI shelter (housing) consists of periodic surveys of old and new leases, so the old ones turn over slowly. Owner’s Equivalent Rent (OER) uses rent survey data to fabricate an inherently implausible average estimate of what millions of owned homes could have been rented for. OER alone is a fourth of the CPI, and OER plus rent means shelter accounts for 34 percent of the CPI and 42 percent of Core CPI.
A long data lag makes these overweighted housing inflation estimates so misleading the Fed Chairman Powell has warned against measuring inflation services without first removing housing. If we look at “CPI less shelter,” the average annual rate of inflation over the past ten months was 0.6 percent. And the producer price index (PPI) – which also excludes housing – rose at a similar 0.9 percent rate.
The Fed and media define inflation as each month’s increase from a year earlier. But that 12-month average remains exaggerated because annualized inflation rates in May and June of 2022 were 11-14 percent, partly due to the Russia-Ukraine invasion. Once we drop those oldest and most extreme months out of the 12-month year-to-year average, CPI inflation falls to 3.3 percent for the past ten months rather than 4.9 percent for twelve.
Before that, from April 2021 to June 2022, CPI inflation averaged 8.6 percent. Getting inflation down from 8.6 percent to 3.3 percent belies the cliche about inflation being sticky or stubbornly high. Yet that 3.3 percent figure drops much further – to 0.6 percent – if we exclude shelter.
Why exclude shelter from the CPI? Because the numbers are wrong.
Energy prices in April were down 4.9 percent from a year earlier, but shelter prices were up 8.1 percent. The Fed and the Fed press corps want to remove food and energy from the CPI, but doing that makes shelter 42 percent of that shrunken “core” index. Yet energy prices really are much lower than a year ago, while home prices or rents are definitely not rising at an 8.1 percent rate as published CPI figures suggest.
Fed Chairman Jerome Powell explained the reason for excluding housing from inflation statistics in a November 30, 2022 speech at the Brookings Institution:
