Thursday’s report on consumer prices was really good news. I mean, really, really good news. The overall Consumer Price Index actually fell slightly for the month of December. We can and should downplay that number, because it was driven in part by special factors like a plunge in gasoline prices and because monthly data are noisy. But even when you try to filter out the noise by excluding more volatile prices and looking at averages over several months, you get a picture of rapidly slowing inflation.
So what’s a pessimist to do? Inflation numbers have been getting better for a while, but the Federal Reserve — which is very unwilling to risk letting up on its inflation fight too soon — has been insisting that inflation is still hot if you look at what it considers more fundamental measures, especially the price of core services, excluding housing, purchased by men with facial hair.
OK, I made up that last part about the facial hair. But the rest is true: The Fed has decided to be pessimistic based on a quite narrow measure. And we won’t have a read on the Fed’s currently preferred inflation measure until a somewhat different set of inflation numbers comes out on Jan. 27.
But the attempt to stay pessimistic on inflation is starting to feel a bit desperate. Also, it represents a strange role reversal from the early days of the recent bout of inflation, when some economists, myself included, formed what many people called Team Transitory, arguing that rising inflation was a temporary result of pandemic-related disruptions and would soon recede.
Actually, at this point inflation is looking somewhat transitory, although it went much higher for much longer than I, at least, considered possible. But one of the ways I and others argued for transitoriness aged poorly. For a while we kept excluding particular parts of inflation that looked idiosyncratic, arguing that what remained looked OK. But the range of goods and services experiencing high inflation kept widening, and we were eventually forced to concede that this was an economywide problem.
Now, however, the upper hand is on the other foot, with inflation pessimists probably making the same mistakes inflation optimists were making a year and a half ago.
This is not to say that it never makes sense to try “looking through” overall inflation to get at some underlying number. Traditional “core” inflation, which excludes volatile food and energy prices, has been an extremely useful gauge over the years. Among other things, it helped the Fed stay the course in 2010-11, when a spike in gasoline prices led to unwarranted demands that it stop its efforts to fight unemployment.
Unfortunately, the traditional core measure hasn’t served us well lately, partly because the pandemic produced huge volatility in prices beyond food and energy, such as those of used cars.
And rising demand for housing, probably driven by the rise in working from home, led to a one-time surge in the rental rates that are used by the Bureau of Labor Statistics to estimate shelter costs, which in turn make up about 40 percent of core prices. Unfortunately, the way the bureau does this means that official shelter inflation lags far behind current developments in the rental market, which means that a lot of current core inflation reflects what was going on in the housing market a year ago and doesn’t capture the huge rent slowdown that has happened since.
This content was originally published here.
