How "FHFA-CPI" using home prices instead of OER shows a sharp slowdown in inflation

– by a New Deal Democrat

Paul Krugman made another foray into the “inflation almost gone” genre over the weekend with Mastodon theme which relies heavily on the following graph:

conclusion that

“[A]At this point, the burden of proof is on anyone who claims that we’ve had more than, well, a temporary inflationary spike that’s pretty much behind us.”

I’m very disappointed with Krugman’s argument, mainly because his “super core” measure of inflation boils down to “if we exclude all the items that the CPI says are really going up in price, plus fuel, then things aren’t really going up in price.”

Well yes.

Since the inflection point of this whole argument is June, I thought I’d try a fairer representation of the main sectors affected. So, below is a bar chart that breaks down all the measures through the first and second half of 2022, starting with headline inflation (blue), then subtracting food and energy (red), energy (gas) ( gold) and shelter (purple). The final three bars focus on shelter (brown), home prices via the FHFA purchase-only index (lavender), and finally energy (blue):

This makes it clear that both headline and core inflation did not differ much in H2 from H1. In fact, officially measured shelter prices accelerated from +2.7% in the first half to +3.8% in the second half.

The big drop is in house prices, which are not in the official CPI and which fell from +8.6% in the first half to -0.4% (-0.27% to October, the last month reported, extrapolated to 6 months) in the second semester; and energy, which slowed from +18.2% in H1 to +0.3% in H2 (this despite the huge drop in gas prices from $5 to $3 between June and December).

So I disagree with Prof. Krugman’s analysis using his chosen “supercore”. Inflation, as officially measured, is not “mostly behind us”.

However, if the question is “Should the Fed keep raising rates?” then I reach the same conclusion but for a different reason; namely, this officially measured CPI for shelter lags what is actually happening in the housing market (as represented by prices) by 12 months or more. I show this below through the “FHFA-adjusted” total and core CPI, which substitutes the FHFA purchases-only index for the CPI shelter. The only difference is that since the FHFA is only reported through October, the chart below is quarterly, not semi-annual:

It is now clear just how much inflation, as it is more correctly considered by the Fed, has slowed sharply since June.

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