Fed Is Not Just Behind The Curve, It’s Driving The Bus Over The Cliff
So the Fed didn’t raise rates again. And the timing of the rate increase will be data dependent. Ho hum.
There’s just one little problem. The inflation measures the Fed watches really don’t measure inflation. The Fed won’t see what its cronies in the government and economic establishment refuse to measure, which is that we’ve already long since passed the Fed’s 2% inflation target.
Every 3 months the US Census Bureau releases the results of its quarterly housing survey. We now know that rents rose by 6.2% year over year in the second quarter. But the fictitious number that the BLS uses to account for housing costs in the CPI, called Owner’s Equivalent Rent (OER), is only up by +2.9% year over year. The difference of 3.3% is known by the technical term: fudge factor. In this case, the BLS is undercounting the housing component of CPI by more than half.
Owner’s equivalent rent and actual renter’s rent account for 31% of the total weight of the CPI. Multiplying the weighting of this component by the 3.3% fudge factor cuts a full 1% off the headline CPI and 1.3% off core CPI. If rent were counted accurately, headline CPI would be 2.2%, year over year, not 1.2%. Core CPI (excluding food and energy) would be +3.1%, not 1.8%.
Since Core has lately been stronger than the headline number, the Fed has naturally shifted its focus away from Core. But it doesn’t matter. The Fed is behind the curve. Way behind.
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