Good morning r/Superstonk! Thank you u/rensole for the Inflation call out in the Daily Stonk and helping to get eyeballs on this insidious beast! I want to follow up on yesterday’s June CPI report with a dive on 2 reasons why the reported CPI is higher than actually reported.
However, I want to begin by revisiting why this is BAD, even if it is ‘transitory’:
The Dollar losing purchasing power + Inflation = Permanent Loss of purchasing power
-4.66% loss in buying power over the last year already, the last 3 months, annualized, would be -6.41%.
|Month||Consumer Price Index for All Urban Consumers: Purchasing Power of the Consumer Dollar in U.S. City Average|
Even if inflation is ‘transitory’ only deflation can restore this buying power (which is pretty rare), but you can see a period of it in the chart in 2008 when it jumps back up, before diving down again.Ok, onto two of the reasons why the CPI is really higher than listed: ‘owners’ equivalent rent of residences’ and ‘hedonic quality adjustments.
I highly recommend reading each of the linked articles before we dive into each section, as I am sure they are going to explain this way better than I fear I am about to butcher! The owners’ equivalent reporting is linked to April’s report, but the concepts hold true for us here in June.
Housing costs (rent and homeowners) are included in the CPI as services and account for about one-third of the overall CPI.
This is big, but it barely moves despite the surging housing and rent costs we have been covering!
From the article on owners’ equivalent, the Case-Shiller Home Price Index, which measures the price changes over time for the same house and is, therefore, an appropriate measure of house price inflation is also BLOWING UP:
So Jellyfish, how the hell is this out-of-control price inflation getting missed in the CPI report?!?!!?
Simple, they just don’t track it. It is survey-based, and follows what homeowners think their home might rent for, hence the name, “owners’ equivalent rent of residences.”
Thus, this is the first way, through gimmicky accounting, that the CPI is able to be kept artificially low. However, there do appear to be cracks in this story forming. For example, hotels (lodging away from home) is a small piece of the pie (.9% of CPI), but it isn’t impacted by the homeownership and rent fuckery from above. Prices jumped by 7.9% in June, and are up 16.9% year over year.
I grant that prices may be catching up to where they used to be, but this appears to be a lot like rents across the country: urban area hotels that are just now coming back online as places open back up but hotels that cater to people who have wanted to get away, especially areas around national parks for example), have been booked solid, and prices have jumped.
On to the second piece of trickery:
The CPI would have you believe from the chart above that used car prices dropped before this recent bout of craziness we are seeing. This is ridiculous, prices have obviously gone up!
However, because the Bureau of Labor Statistics (BLS) uses “hedonic quality adjustments” to account for improvements in vehicles over the years (for example, from a six-speed manual transmission to a 10-speed electronically controlled transmission). The price increases estimated to be associated with “quality improvements” are removed from the CPI for new and used vehicles.
The CPI is supposed to measure price changes of the same item over time. However, when the item is improved then it’s no longer the same item, and the price increase is not inflation because it reflects a new (and theoretically) better product.
In reality, these tricks are causing purposeful, and very bipartisan understatement of inflation as measured by CPI—same as with the housing data. How can one not conclude that the idea is to keep the general public in the dark?!?
What does it all mean?
A couple of things: The CPI number released yesterday is a joke because it heavily understated housing and other gimmicky tricks. However, other categories are showing sustained prices increases. Yes, spike-like used cars cannot last (I don’t think?) and appears to be coming down a bit?
But does anyone think we are going to see enough deflation to bring prices back into check? They will come down a little but stay high!
I think what we are likely to see in the coming months is ups and downs of the monthly inflation rate that will give The Fed and politicians false hopes of declining inflation, followed by increases that obliterate these hopes.
What’s worse, as we covered above, we still don’t know the ACTUAL inflation rates because of the fuckery around housing and how the BLS runs wild with overly liberal hedonic quality adjustments.
All of this is happening in the backdrop of the Fed still plowing away with $120 billion in assets purchases each month:
$40 billion a month in mortgage-backed securities. This will continue to depress mortgage rates and only continues to add gasoline to the inflation fire.
$80 billion in Treasury securities a month (with policy rates near 0%): represses short-term and long-term interest rates in general, and inflates asset prices and consumer prices, which further DESTROYS the purchasing power of the dollar.
So ladies and gentlemen of r/Superstonk, inflation is here, it’s bigly, understated, and going to keep moving up and down in categories on a month-to-month basis. In my opinion, inflation is the first thing ‘breaking loose’ and going off the rails from all the can-kicking from the last crisis to today.
Other things of note in the report:
- The all items index rose 5.4 percent for the 12 months ending June; it has been trending up every month since January when the 12-month change was 1.4 percent.
- The index for all items less food and energy rose 4.5 percent over the last 12-months, the largest 12-month increase since the period ending November 1991. The energy index rose 24.5 percent over the last 12-months, and the food index increased 2.4 percent.
- The index for used cars and trucks rose sharply for the third consecutive month, increasing 10.5 percent in June. This was the largest monthly increase ever reported for the used cars and trucks index, which was first published in January 1953.
- The food away from home index rose 0.7 percent in June following a 0.6-percent increase in May. The index for full-service meals rose 0.8 percent, its largest monthly increase since last June.
- The index for food away from home rose 4.2 percent over the last year, the largest 12-month increase in that index since the period ending in May 2009.
- The index for new vehicles rose 2.0 percent in June, that index’s largest 1-month increase since May 1981.