The latest round of inflation is functionally solved and barring any unforeseen economic shocks, we are only two months away from full resolution. While this is not a prophetic revelation, it is a widely misunderstood observation. The main reported figure, the headline CPI data, only recently caught up with the reality of the situation. The current inflation figure is much lower than the reported 4 percent year-over-year figure. This discrepancy has not penetrated the Fed, and their misapprehension could lead to policy mistakes.
Those in the real estate sector have noticed the flattening or outright decline of rents across the country, which contradicts the shelter component’s rapid increase in the headline CPI number. This increase is a distortion of our current reality. The cost of shelter is not increasing at an accelerating rate, but it is a lagging indicator.
The Consumer Price Index measurement with the cost of shelter stripped out, or CPI Less Shelter, demonstrates that the rate of inflation hit a wall in June 2022. The most current available number in May 2023 is only 0.07 percent above the June 2022 number, indicating that the most painful upward price shocks are firmly behind us. However, the outdated cost-of-housing data is disguising the true inflation rate, and the headline CPI misleads many.
When the June 2023 numbers become available, the outdated shelter costs will begin to reflect the flattening trend already observed in this area. This flattening will be more reflected in the headline CPI, and inflation will become less of a political concern. The public can shift its focus to dealing with more pressing economic issues.
Policy-makers should pivot away from monetary tightening and explicitly orient policy toward economic growth. A pause in rate hikes is prudent, and the rates already in place are sufficient to continue reducing the money supply. The Fed’s “data-driven” approach is ineffective if the data are obsolete, as in the shelter measure. The Fed should look forward and end the rate-hiking cycle to mitigate the pain of low or negative growth and its unhappy derivative effects. Broadly speaking, price stability has been achieved, and that job is done.
