Kuttner on TAP: The Wildly Misleading Inflation Numbers

The Consumer Price Index rose by 0.5 percent in January, or an annualized rate of 6 percent, according to the Bureau of Labor Statistics. That's up from just 0.1 percent in December. This report in turn prompted a spate of articles warning that the recent slowing of inflation has stalled.

The Wall Street Journal's five-column print headline read: “Inflation Cools but at a Slower Pace.” The New York Times front page headline warned: “Inflation Cools But Prices Give Scant Comfort.”

This press spin in turn gave fresh ammunition to the interest rate hawks at the Fed and spooked stock markets. But a closer look suggests that the headline story is wildly misleading. In fact, inflation is continuing to subside, and the BLS misses what's really occurring.

One sentence in yesterday's Bureau of Labor Statistics release tells us, “The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase.” Take out the supposed rise in housing costs and the subsiding of inflation continues the recent trend.

And the way the BLS calculate shelter (housing) costs gets the story backwards. An accurate accounting would show that both rents and prices of owner-occupied housing have been declining—offsetting other modest price increases in other sectors.

Decades ago, the technical economists at the BLS decided to measure shelter prices with an estimate of the “imputed rental value” of owner-occupied housing. Even worse, they calculate that estimate with a time-lag. Why the BLS does this is a subject for a longer and ever wonkier column, but it is controversial among economists and tends to be spectacularly misleading during periods of rising prices.

The BLS, using this method, contends that the cost of shelter rose by 0.9 percent in January, or 10.8 percent at an annualized rate. But commercial sources such as Zillow and the Case-Schiller Index, which look at real numbers, find that the cost of both rental and owner-occupied housing has been plummeting. (I am normally no fan of privatization, but in this case the private databases get it right and the government's BLS gets it wrong.)

It's not surprising that both rents and prices of owner-occupied homes have been falling. Rental costs peaked during the pandemic when people worked at home and those who could afford it moved to bigger apartments, bidding up prices. That has reversed. And the Fed's successive rate increases have made mortgages more expensive, which has depressed housing prices.

The way the BLS computes housing costs is worse than a methodological error. It's a scandal—providing a bogus rationale for more Fed rate hikes.

Memo to BLS Commissioner William Beach: Go have lunch with the data specialists at Zillow. They know more than you do.

Memo to Sen. Elizabeth Warren: Have a hearing on this.

Memo to Jared Bernstein, the new chair of the Council of Economic Advisers: Make this right.