CPI Unexpectedly Weak, Allegedly No Inflation in October

Mish

The BLS reports 0.0% inflation in October vs 0.2% expectation. Year-Over-Year inflation is allegedly up 1.2%

CPI Month-Over-Month as the BLS Sees Things

CPI Month Over Month As Reported 2020-10

Month Over Month Key Points

  • The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in October on a seasonally adjusted basis after rising 0.2 percent in September.
  • The food index rose 0.2 percent, with the food away from home index increasing by 0.3 percent and a smaller 0.1-percent rise in the food at home index. 
  • The energy index rose 0.1 percent in October as the index for electricity increased 1.2 percent. 
  • The index for all items less food and energy was unchanged in October following an increase of 0.2 percent in September. 
  • The index for shelter increased 0.1 percent in October
  • The index for medical care declined by 0.4 percent. 
  • The indexes for airline fares, recreation, and new vehicles rose.
  • The indexes for motor vehicle insurance, apparel, and household furnishings and operations declined.

The BLS CPI Report says that nets to zero.

CPI Year-Over-Year as the BLS Sees Things

CPI Year-Over-Year As Reported

Year-Over-Year Key Points

  • The all items index rose 1.2 percent for the 12 months ending October, a slightly smaller increase than the 1.4-percent rise for the 12-month period ending September. 
  • The index for all items less food and energy rose 1.6 percent over the last 12 months after rising 1.7 percent in September. 
  • The food index increased 3.9 percent over the last 12 months
  • The energy index declined 9.2 percent. 

Consumer Price Index Components 1990-Present

Consumer Price Index Components YOY 2020-10

What About Housing?

The BLS does not directly include home prices in the CPI. The latest Case-Shiller home price index is up 5.7%.

Instead of using home prices, the BLS uses Owners' Equivalent Rent (OER). OER is determined by asking homeowners how much they would expect to pay in rent if they rented their own house from themselves.

Ask anyone looking to buy a home what inflation looks like. 

Failure to properly account for housing has distorted the CPI continually from 1998 until now. 

The Fed did not spot the housing bubble nor predict the Great Recession because it did not understand the asset bubble.

CPI Percentage Weights

CPI percentage weights 2020

What About Health Care?

CPI Medical Cared Services Year-Over-Year 2020-10

The BLS says the cost of medical care is up 20% from a year ago. 

As anyone buying their own health care how accurate that is. Also ask anyone buying their own health care if it is only 6.97% of their budget.

What About Bubbles?

The stock market and risk tolerance is also a measure of inflation. It is nowhere to be found in the indexes.

Add it all up and the CPI is a gross distortion of reality on many fronts.

Mish

Comments (25)
No. 1-9
Eddie_T
Eddie_T

Owner’s equivalent rent is a joke....keeping up with current rent prices is even hard for investors..which is why I depend on professional management to set rents on most of my properties.

Unless someone is a real estate pro with a finger on the pulse of the market....how in the world would they know what their home would rent for?

You could guess...and your go-by would always be your mortgage payment........and that would most likelybe wrong......on the low side......from day one.....and would get more wrong the longer you owned your home

PecuniaNonOlet
PecuniaNonOlet

No inflation? Food prices, especially beef, are through the roof. On the flip side, my dry cleaner is begging to do my cleaning for free since I havent set foot there in 8 months now.

Doug78
Doug78

I am not sure by including house price inflation in the index would have avoided the housing bubble at all. The lure of zero rates is just too lucrative for Wall Street to pass by. All central banks are doing it now and that in itself is a powerful incentive to keep rates low. Japan set the trend in the early 90's. China followed soon after and now everyone does it. It's a permanent stimulation of the economy that we cannot do without unless we want to end up like Greece or Spain who are in a never-ending depression.

PreCambrian
PreCambrian

My healthcare insurance is 18% of my before tax income. Since it has $6,500/person deductible by the time the pharmacy and the doctors are paid my healthcare costs are around 25% of my gross income. My income is too high for an ACA subsidy.

Counter
Counter

Fud Food total return ETN was up over ten percent today. $17 to $26 in 5 days.

Webej
Webej

Hard to imagine no inflation with 20% increase in medical care.
Health insurance and deductibles etc are my chief expense and everybody in the family is healthy and nobody takes any medicines.

inflation_forecaster
inflation_forecaster

"OER is determined by asking homeowners how much they would expect to pay in rent if they rented their own house from themselves." This is incorrect. That is used to determine the weight of of OER in the index (done once every 2 years).

For the monthly price changes they use rents. (The OER national numbers differ from the rent national numbers because a quote in a heavily owner-occupied neighborhood gets more weight in the OER and less in the tenants' rent index. Also there is an adjustment for landlord-provided utilities so the CPI doesn't double-count those energy prices.)

For more see the BLS handbook of methods, chapter 17.

inflation_forecaster
inflation_forecaster

This is what they actually do. They use rents to construct OER. They do not get the monthly price changes from asking owners what they think they can rent there place for. It is a common misconception brought on by not very clear BLS CPI document: https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf

Note that the question for owners is under the "Weights" section, not the "Price change" section.

inflation_forecaster
inflation_forecaster

Using house prices is possible, but it mixes the investment portion of homeownership with the rent of shelter portion. It would also lead to a MUCH more volatile CPI.


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