Alan Reynolds on “Shelter Prices” and Inflation

Alan Reynolds writes:

Consumer Price Index (CPI) inflation has been zero for two months. Over the past 12 months, prices of food at home are up 1.1 percent, and energy prices are up 1 percent. Yet headlines keep focusing on the 12-month averages of 3 percent for the total CPI and 3.3 percent for “core inflation” (less food and energy). But there is a big problem: Those 3–3.3 percent figures do not reflect a broadly defined measure of inflation since they are largely dominated by shelter costs.

Widely criticized Bureau of Labor Statistics (BLS) estimates of rent and owners’ equivalent rent (a price nobody pays) account for a third of the total CPI and over 40 percent of the core CPI.

Reynolds points out that extreme estimates of shelter prices are also problematic for another reason: they lag reality by 12 to 18 months. Of c0urse, since there is a lag, we don’t know what’s happening to shelter prices in recent months.

But without shelter prices, inflation has been low. Reynolds writes:

Here is the unreported good news: Aside from shelter, CPI Inflation and core inflation rose only 1.8 percent over the past 12 months and were either flat or falling over the last two. (bold in original)

What he means, of course is not that CPI inflation and core inflation rose only 1.8 percent over the past 12 months; he means that CPI inflation and core inflation were only 1.8 percent over the past 12 months.

 

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