Global| May 12 2021Biggest Rise In Consumer Prices In More Than A Decade Is Understated By Half
|in:Viewpoints
Summary
Inflation has arrived, evident by the 4.2% gain in the consumer price index over the past twelve months. But the most significant increase since 2008 still is not fully capturing "experienced" inflation since it is missing the rise in [...]
Inflation has arrived, evident by the 4.2% gain in the consumer price index over the past twelve months. But the most significant increase since 2008 still is not fully capturing "experienced" inflation since it is missing the rise in housing inflation.
The Bureau of Labor Statistics reported that April consumer prices rose 0.8% from the prior month. Also, the widely followed core prices (which exclude food and energy) rose 0.9%, pushing that sub-index to a 3% gain in the past twelve months, the biggest increase since 1995.
However, the acceleration of core consumer prices in the past twelve months is unlike that of 1995. Owners rent, which accounts for roughly one-third of the core index, is up only 2%, or 100 basis points below the core reading. In 1995, the 3% core reading included an even bigger 3.5% rise in owners' rent. So the rise in core inflation in 2021 is much broader than what happened more than two and half decades ago.
More importantly, as big and broad of an increase in April's consumer prices is, it still does not fully capture the actual rise in consumer inflation. Housing prices are up 18% in the past twelve months, a record increase; nine times the increase in owners' rent. The old CPI included house prices. Inserting house prices in place of the non-market owner rents, reported inflation would have been twice the 4.2% gain.
Policymakers often measure the scale of monetary accommodation by comparing nominal rates to reported inflation (the so-called real interest rate). By maintaining the zero rate policy in the face of sharply rising inflation, monetary policy has been even more accommodative. Inflation cycles feed on easy money: so the odds increase with each passing day that the new inflation cycle will not prove to be "transitory".
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.