The Consumer Price Index for January was a bit higher than economists had forecast. To be precise, it was up 0.3 percent for the month, while the consensus prediction of economists was 0.2 percent. Stop the presses! But that blip was enough to cause the stock market to plummet, on expectations that the Federal Reserve will wait until much later in 2024 than expected to begin cutting rates.

Could we please get a grip?

For starters, the supply-chain inflation of the pandemic era is over. Inflation for all of 2023 was just 3.1 percent. Getting it all the way down to the Fed's target of 2 percent could take a while longer. But 2 percent is an arbitrary benchmark. For long periods of time, the economy has done just fine with inflation of 3 percent or even more. It makes no sense to use high interest rates to keep the economy from realizing its full potential just to hit an unrealistic inflation target.

There is also the weird and misleading role of “shelter” in the Consumer Price Index. For January, the CPI recorded that shelter costs increased 0.6 percent in a month, bringing the annual increase in housing expenses for all of 2023 to 6 percent, or almost double that of the CPI as a whole. For January, the increase in shelter costs accounted for over two-thirds of the CPI's monthly rise.

But if you unpack the CPI calculations for shelter, it is a poor guide to what's really happening in the economy. The index for owner-occupied housing is calculated by looking at the presumed rental value of occupying your own house. And in any given year, most people do not buy houses. Zillow's index, reflecting actual home sales, was up only 3.1 percent for 2023. That's a better reflection of what's actually happening in housing markets.

As for rents, they are rising because of a chronic shortage of affordable housing. That shortage is the result of inadequate housing policy. It’s a long-term problem. Sandbagging the economy with high interest rates will not cause more housing to materialize. On the contrary, high borrowing costs will make it more costly for builders to produce housing.

The Fed and the commentators in the financial press are in a kind of conspiracy of ignorance that gives too much weight to misleading economic indicators of price increases. The real economy—which is to say us—pays the real price.