Mildly Dovish Fed Statement
The Fed statement acknowledged that “there has been a lack of further progress towards the Committee’s 2% inflation objective”, which we ...
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Infrastructure Capital Advisors
Income from Real Assets
ADJUSTED CPI REPORT
Updated January 2024:
Infrastructure Capital Real-Time Consumer Price Index Analysis
CPI-U vs CPI-R Adjusted
New York - Updated January 22, 2024 ~ The team at Infrastructure Capital Advisors has updated the Real Time Consumer Price Index (CPI-R). We believe that the Case-Shiller Home Price Index provides a more current estimate for shelter inflation and should be substituted as the shelter component in the Consumer Price Index (CPI). The BLS methodology is only updated every 6 months and relies on homeowners estimating rents on their own homes. This method creates a 12-18 month lag in the series.
December CPI Analysis Summary for CPI-U vs CPI-R:
Monthly CPI Analysis Summary for CPI-U vs CPI-R:
December core CPI was 0.1% above expectations at 0.3% QoQ and 3.9% YoY. CPI-R was up 0.4% QoQ and 3.3% YoY. The Case-Schiller Home Price Index was up 0.6% QoQ and 4.9% YoY. This compares to CPI reported shelter inflation of 0.5% QoQ and 6.4% YoY. The shelter components for both indices were in line with the prior month of November.
We continue to believe that the Fed is fundamentally flawed as it myopically focuses on the unadjusted PCE core measure and rigidly sticks to its 2% target despite overwhelming evidence that the target significantly worsened the Great Recession and has stifled middle-class wages. For this reason, we expect that the Fed will only cut rates twice in 2024 compared to market expectations of four cuts.
However, we continue to be bullish on global interest rates, as all but one of the OECD countries are projected to cut rates by over 1% this year. We are projecting 10-year interest rates will fall into the 3-3.5% range and that global rate cuts will result in higher stock and bond prices.
How Our Adjusted CPI-R analysis can help the Investing Community
We believe financial firms / advisors and individual investors can use our adjusted CPI-R to better recognize real-time changes in the economy and use that for better investing strategies. It also helps investors recognize the impact of housing and rental costs on CPI and the economy in general and use that to more closely scrutinize Federal Reserve views on the economy and understand the Housing Market better and how it could impact their portfolio.
The Adjusted CPI (CPI-R) Index:
The index uses seasonally adjusted Core-CPI (excluding Food and Energy) while adjusting the methodology for Shelter. Rather than using the highly lagged and subjective owner’s equivalent rent, CPI-R uses the “Case-Shiller 20-City Composite Seasonally Adjusted Index”, a more current indicator of shelter prices.
See below for the Core CPI vs ICA Adjusted CPI data with the monthly update. Click on the table image to enlarge it for better reading or click SEE FULL REPORT PDF to go to the PDF reader to read, save, or print this data file.
CORE CPI vs ICA ADJUSTED CPI DATA
Updated with December 2023 CPI Data - Reported in January 2024
Click HERE to open a PDF with data in easier-to-view and printable format.
Prelude to the creation of the real-time consumer price index:
The critical disadvantage of the CPI is that in the early 1980s, the methodology was changed for estimating the cost of shelter from using changes in housing prices to an arcane and highly lagged measure focused on rent and owner’s equivalent rent. The issue with this change is that it creates a huge lag between the onset of inflation in shelter costs and the ultimate reflection in the CPI.
Specifically, the BLS uses a survey of homeowners asking them what they think their house would rent for. This methodology has two significant issues: the survey creates a big lag and homeowners may or may not have any idea what their own homes would rent for, since they are unlikely to rent out their own homes. These flaws render the CPI useless as a useful real-time indicator of inflation. In fact, it is classified as a lagging indicator of economic activity by economists.
If the Fed had been analyzing real-time indicators of inflation, they would have started tightening policy in 2020 instead of starting at the beginning of 2022. In addition, the Fed should have paused rate increases in July of 2022 when the real-time core CPI turned negative with a -.2% reading. The table above summarizes the Infrastructure Capital Real-Time Consumer Price Index (CPI-R). The data makes it clear that the Fed perpetrated an obvious major policy error by keeping its excessive monetary stimulus in place through the end of 2021.
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