The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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August 17, 2006

More On The July CPI

In response to my previous post on the July CPI, MarketWatch's Rex Nutting asks (in the comment section):

The figures certainly look bad. But I still wonder what the impact has been from the distortion in owners equivalent rent. OER and rents each went up 0.4% in July so it makes sense that the median CPI also went up 0.4% because shelter is such a huge part of the CPI (about 30%).
Isn't the rise in OER also a temporary factor, just as the decline in apparel was in July? And isn't it also an inflationary factor that can't really be solved by higher rates?

It turns out that the median CPI last month was actually rent, not OER.  But the point is still well-taken.  Over the Great Housing Boom of the New Millennium, rents have seemed quite low relative to housing prices, but they have been increasing at a pretty good clip this year. Here's a picture, from the Cleveland Fed's July issue of Economic Trends:




To the extent that those rent increases are catch-up, we would indeed guess that the process will play itself out soon enough (assisted, no doubt, by moderating/stalling/falling housing prices).

But that is the crux of the issue: What fraction of largish price changes -- appropriately weighted for their importance in consumers' market baskets, as Rex correctly reminds us they should be -- can we comfortably attribute to stubbornly persistent, but temporary, factors?  I don't really have an answer to that, so I'll let you decide for yourself:






By the way, you guys really should be eating more fresh fruits and vegetables.

August 17, 2006 in Data Releases , Inflation | Permalink


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Personally, I've been lost with "core" value since Arthur Burns. Sure, eliminating noise makes sense, but when oil prices continue their upward spiral for years, shouldn't we somehow at some point consider this more than noise?
Separately, I've again linked to Tim Iacono below who again guestions the Fed's ability to accomplish its goals (again quoting Henry Kaufman who argues the markets are always one step ahead).
Iacono's point, is that "What most casual observers of the Federal Reserve fail to understand is that there are two very important components to implementing monetary policy - borrowing costs and availability of funds."

Posted by: bailey | August 17, 2006 at 08:50 PM

Ever more parsing of the numbers wont change the fact that the price level has been going up.

The price of everything other than manufactured items from the far east has gone up substantially over the past few years.

Posted by: Fullcarry | August 18, 2006 at 09:00 AM

One of the hallmarks of intelligence is the ability to discriminate. Smart people should be able to look at the all-items series, the core series, the impact of owners equivalent rent on both series, and make sense of them. There is value in knowing why things do what they do.

Core CPI and assessments of the impact of various core factors are being treated like some sort of cheat. BLS still publishes an all-items CPI measure. Nobody is hiding the all-items series. This iother stuff is still good to know.

Posted by: kharris | August 18, 2006 at 01:29 PM

Maybe this is a very naive question. But if the BLS found rent to be a less noisy measure than ownership cost for consumption, despite the lag between ownership costs and cost of renting, wouldn't you have to be consistent with when you started raising rates and stopped raising rates? That is, if you don't increase rates in the anticipation of rent increases, you cannot also decrease rates in the anticipation of rent stabilization? If house prices started to fall faster than the rate of interest rate increases, a stable point will be reached compared to renting.

Posted by: RB | August 18, 2006 at 04:33 PM

Thanks David. Nice, thoughtful reply.

Posted by: rex | August 18, 2006 at 04:36 PM

I have ranted my opinion of the problem with the "core" rate lagging real inflation so often over the past two years, I bore myself. I keep having one of those "why is everyone else so wrong when I'm obviously right?" moments.

Asset,commodity, and financial inflationionary spirals, and subsequent deflationary reflexivity, has been at the root of every bad economic environment that I have experienced. The 70's was commodity and housing followed by wages, 87 was an equity crash following the savings and loan building bubble and liquidity driven equity bubble, the Japanese depression has been related to real estate and equity bubbles, the LTCM was related to the bursting of an asian asset bubble that was funded with funny money, the NASDAQ was an equity bubble bursting following the California energy, Telecom, and the Sumitomo copper swindles.

All of the economic misadventures are created by liquidity driven bubbles (inflation) that the core measurement completely misses. Worse, the core rate lends a false sense of security and justifies sustained, excess liquidity creation until the speculative bubbles have created an intractable mess.

The measure of inflation should reflect the degree of current pricing and speculation. How about, at least, a core plus model that takes into account asset, commodity, and equity bubbles? Data supporting my views can be observed at:


The current housing situation speaks for itself.

Thanks for the blog space.

Posted by: quiz | August 20, 2006 at 12:57 PM

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