Inflation’s Got The Stickies

Get out your magnifying glass. The January CPI “cooling” being touted by the financial press is based on a Y/Y CPI increase of 6.34716% this month compared to the 6.44494% rise reported in December.

That is to say, Wall Street is so desperate for a return to easy money at the Fed that’s it’s gone all squinty-eyed, attempting to pick pepper out of the fly shit.

But to use Joe Biden’s vernacular, c’mon man!

The December rate of increase meant that in ten years $1,000 of savings today would be worth $514. And at the January rate, the ten years from now purchasing power would be worth $519.

Either way, that’s inflation with a vengeance. And that’s also true whether the Y/Y rate of increase is 4%, 6% or 8% because inflation is cumulative. What ultimately matters for the health of the economy and the pocketbook of the purported almighty consumer is the price level, not the short-run rate of change.

For example, today’s bullish blather from the likes of Wharton Professor Jeremy Siegel is the claim that shelter inflation is way overstated. That’s purportedly because this CPI component, which accounts for more than 40% of the so-called “core” CPI, lags by up to 12 months the “asking” rent market as tracked by private real estate services.

Actually, that’s true but irrelevant. Rental contracts typically run for a year or longer, meaning that the “asking” rate increase for any given month represents just 1/12 of the total rent roll. What the monthly CPI captures, therefore, is the weighted average gain for all rental contracts outstanding, not just the new ones entered into during the current month. When it comes to the BLS’ rent-based measure of shelter costs, in fact, the CPI is reasonably accurate.

More importantly, when there have been outsized gains in asking rents for a period of time, it is not surprising that the rate of monthly gain would eventually cool owing to supply increases triggered by rising rents. But unless asking rents plunge into free-fall and retrace back to the status quo ante, average rents go progressively higher and consumer purchasing power is systematically eroded.