Nobel economist Paul Krugman says housing and labor market data may be overstated, and inflation could be dropping rapidly

• Inflation could be falling rapidly on overstated economic data, according to top economist Paul Krugman.
• He pointed to cooling home prices and wages, which can lag behind more widely cited official statistics.
• That could mean the Federal Reserve may not have to raise rates as high as previously thought.

Inflation could be dropping rapidly as certain housing and labor market data points may be overstating prices, according to Paul Krugman.

In a Twitter thread on Thursday, the Nobel laureate drew a contrast between government data often cited by the Federal Reserve that show more inflationary pressure and private-sector data that indicate cooler inflation.

"At this point many observers are aware that rising official shelter prices largely reflect a surge in rents last year, largely driven (we think) by work from home. Recent market rent inflation is low, maybe even negative. Something similar although less drastic may be happening with wages: averages rising bc of a hot market some months ago," Krugman said, commenting on data from Indeed and Zillow.

Shelter prices in Labor Department data saw their largest one-month increase in over 20 years, climbing by 0.8% in October. The November Jobs report also showed hourly wages rising at its fastest pace since January, climbing 0.6% last month.

Those indicators could spell major trouble for the economy, since housing contributes to 40% of core inflation, while wage growth could keep inflation sticky and force the Fed to be more hawkish.

But economists have noted that data may be distorted: home prices, for instance, often lag behind the official statistics by about 18 months, according to Wharton Professor Jeremy Siegel.

And Krugman pointed to cooling housing data, such as Zillow's annualized three-month measure of shelter inflation, which shows prices rapidly falling. Wages advertised in Indeed job postings are also cooling, growing just 6.5% in November compared to 9% from March this year, according to the Indeed Hiring Lab.

That suggests housing and wages could actually be sources of disinflation. Krugman previously warned the Fed is running the risk of overtightening the economy and urged central bankers to pause rate hikes instead.

The Fed has scrambled to rein in prices by hiking rates a whopping 375 basis points this year, with another 50-basis-point hike expected next week.