…AND CHEAPER…:

We Are Still Measuring Inflation All Wrong (Alan Reynolds, 2/26/24, Cato)

Owners’ equivalent rent purports to measure monthly variations in a price nobody pays, and to average those estimates for every house in the entire country. Nearly every other country wisely excludes such impossibly arbitrary OER estimates from their measure of inflation. Yet that singular made‐​up number dominates the US CPI, and to a lesser extent the Personal Consumption Expenditures (PCE) inflation index too.

Shelter accounts for 36.1 percent of the CPI and 42 percent of Core CPI. Shelter also accounts for 60 percent of measured inflation in non‐​energy services. This turns out to matter quite a lot, because estimated inflation for shelter has long been extremely high, while inflation for everything else has been extremely low.

The Graph shows that from July 2022 to January 2024, the average CPI inflation rate for shelter was 7 percent, yet the average inflation rate for everything else was only 1.2 percent. This January alone, the reported annual inflation rate for shelter was 6.9 percent, but inflation for everything else was 1.6 percent.

IT’S IMPOSSIBLE TO OVERSTATE DEFLATIONARY PRESSURE…:

Has the Great Upshift arrived?: Another strong quarter for US productivity growth is far from conclusive. But it’s also a super encouraging sign. Let’s enjoy it. (JAMES PETHOKOUKIS, FEB 1, 2024, Faster, Please)

[T]he US Bureau of Labor Statistics today released the 2023 fourth-quarter result for nonfarm business sector productivity, and it was pretty good — again. Productivity rose by a better-than-expected 3.2 percent during the final quarter of last year and was up by 2.7 percent on a year-ago basis. Even better, productivity growth has now increased at a rapid pace for three straight quarters, including 4.9 percent in Q3 and 3.6 percent in Q2.

Given both the advances in artificial intelligence/machine learning, which emerged before ChatGPT in 2022, and similarly strong productivity numbers in 2019, the last pre-pandemic year, it’s certainly worth contemplating whether we’re seeing the start of a (hopefully sustained) period of elevated productivity growth. Which would be totally awesome for several reasons.

For starters — and this is the thing that’s top of mind for most people, including Wall Street — strong productivity growth has contributed to a “Goldilocks” scenario where inflation has declined even as the economy has continued to grow.

…as labor and energy costs trend towards zero.

RATES ARE USURIOUS:

Disinflation Dream Come True (Alexander W. Salter, December 1, 2023R, AIER)

The current target for the federal funds rate, which is the Fed’s key policy interest rate, is between 5.25 and 5.50 percent. Using core PCEPI growth, the inflation-adjusted range is 3.29-3.54 percent. As always, we must compare this to the natural rate of interest. Sometimes called r* by economists, this is the inflation-adjusted rate consistent with maximum employment and output, as well as non-accelerating inflation. We can’t observe this rate directly. But we can estimate it. Widely cited figures from the New York Fed place r* between 0.57 and 1.19 percent. That means current market rates are roughly three times as high as the estimated natural rate!

TRANSITORY IS AS TRANSITORY DOES:

Prices are going down. Here’s where you can see the difference. (Becca Stanek, 11/23/23, The Week)

According to Nerdwallet, citing data released in November by the Department of Labor, the “consumer price index — a proxy for inflation — remained flat from September to October, at 3.2%.” Moreover, the consumer price index report “shows year-over-year price index drops in 92 goods and services categories (among 338 measured).”

In further evidence of this trend, “retailers such as Walmart say an era of price hikes is fading,” The Wall Street Journal reported. Meanwhile, “Adobe, which tracks online sales through its analytics arm, predicts holiday discounting will hit record highs.”

TRANSITORY IS AS TRANSITORY DOES:

Pockets of price deflation might be around the corner — just ask Walmart (Neil Irwin & Courtenay Brown, 11/17/23, Axios)

The American Farm Bureau said in its annual tally that the average price of a Thanksgiving dinner meal with turkey and sides is down 4.5% from 2022’s record high.

The intrigue: For general merchandise — all items excluding groceries — Walmart is rolling back pricing, “which will help our customers during this holiday season,” McMillon said.