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**FEBRUARY 15, 2023**

Kuttner on TAP

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**** The Wildly Misleading Inflation Numbers

The Consumer Price Index gets the story of housing costs backwards.

The Consumer Price Index rose by 0.5 percent in January, or an
annualized rate of 6 percent, according to the Bureau of Labor
Statistics. That's up from just 0.1 percent in December. This report in
turn prompted a spate of articles warning that the recent slowing of
inflation has stalled.

**The Wall Street Journal**'s five-column print headline read:
"Inflation Cools but at a Slower Pace." The New York Times front page
headline warned: "Inflation Cools But Prices Give Scant Comfort."

This press spin in turn gave fresh ammunition to the interest rate hawks
at the Fed and spooked stock markets. But a closer look suggests that
the headline story is wildly misleading. In fact, inflation is
continuing to subside, and the BLS misses what's really occurring.

One sentence in yesterday's Bureau of Labor Statistics release
<[link removed]> tells us, "The index for
shelter was by far the largest contributor to the monthly all items
increase, accounting for nearly half of the monthly all items increase."
Take out the supposed rise in housing costs and the subsiding of
inflation continues the recent trend.

And the way the BLS calculate shelter (housing) costs gets the story
backwards. An accurate accounting would show that both rents and prices
of owner-occupied housing have been declining-offsetting other modest
price increases in other sectors.

Decades ago, the technical economists at the BLS decided to measure
shelter prices with an estimate of the "imputed rental value" of
owner-occupied housing. Even worse, they calculate that estimate with a
time-lag. Why the BLS does this is a subject for a longer and ever
wonkier column, but it is controversial among economists
<[link removed]>
and tends to be spectacularly misleading during periods of rising
prices.

The BLS, using this method, contends that the cost of shelter rose by
0.9 percent in January, or 10.8 percent at an annualized rate. But
commercial sources such as Zillow
<[link removed]> and
the Case-Schiller Index, which look at real numbers, find that the cost
of both rental and owner-occupied housing has been plummeting. (I am
normally no fan of privatization, but in this case the private databases
get it right and the government's BLS gets it wrong.)

It's not surprising that both rents and prices of owner-occupied homes
have been falling. Rental costs peaked during the pandemic when people
worked at home and those who could afford it moved to bigger apartments,
bidding up prices. That has reversed. And the Fed's successive rate
increases have made mortgages more expensive, which has depressed
housing prices.

The way the BLS computes housing costs is worse than a methodological
error. It's a scandal-providing a bogus rationale for more Fed rate
hikes.

Memo to BLS Commissioner William Beach: Go have lunch with the data
specialists at Zillow. They know more than you do.

Memo to Sen. Elizabeth Warren: Have a hearing on this.

Memo to Jared Bernstein, the new chair of the Council of Economic
Advisers: Make this right.

Continuing my recommendations of other articles you might like at
prospect.org <[link removed]>:

Jared Facundo investigated the regulatory failures that caused that
toxic train wreck
<[link removed]>
in Ohio.

Ryan Cooper has a terrific piece on Covid and the immune system
<[link removed]>.

And I wrote a feature on why breaking up with China
<[link removed]> is so hard
to do.

Thanks for reading!

~ ROBERT KUTTNER

To receive this newsletter directly in your inbox, click here to
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The Chinese Spy Balloon Is No Big Deal
<[link removed]>
Intelligence gathering is always going to happen between great powers.
BY RYAN COOPER

The Border Patrol's Power Grab
<[link removed]>
The agency seeks more authority from the legislature to nab trespassers
and others in Texas. BY JASON BUCH, THE TEXAS OBSERVER

Those Things Floating in the Sky, Explained
<[link removed]>
Today on TAP consults an expert. BY HAROLD MEYERSON

 

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