A More Accurate CPI: Up .97% MoM and 7.1% YoY

The CPI data for September came in hotter than expected at 0.4%. That pushed the yearly gain to 5.4%. But an honest CPI calculation would come in even hotter.

I am doing something different this month. In past reviews of the CPI, I typically take the BLS data and recalculate the values to get a more detailed number that is rounded to two decimal points instead of one. This methodology also allows me to show the impact of each component on the top-line number.

The Fallacy of Owners Equivalent Rent

For example, last month showed that much of the slowdown could probably be attributable to Delta slowdown like travel. For this month, sure, I could report that: “The latest seasonally adjusted month over month inflation rate was .41% (vs .3% expected), with a non-seasonally adjusted annual rate of 5.4% (vs 5.3% expected). The changes were driven mostly by an increase in Food and Shelter…”. But everyone knows that number grossly understates the true cost increases.

The CPI has been modified and doctored continuously to try and bring down the reported inflation number. Shadow Stats has done a great job of continuing to calculate inflation as it was in the past to show the impact of these changes. I didn’t want to recreate the wheel, so instead, I decided to make one simple change to my normal methodology. What happens if Shelter actually reflects the true cost increase of Shelter?

I was triggered by a recent article from Zumper that shows rent prices are exploding higher. Peter Schiff often hammers the point that Owners Equivalent Rent (OER) is a complete farce and grossly misrepresents housing costs. Shelter accounts for 32.5% of the CPI. Within Shelter, Rent and OER make up 98.5% of the metric. This means that Rent has a massive effect on the CPI.

The BLS has a factsheet explaining in detail the rental calculation and why they use OER. The BLS claims that “House prices frequently appreciate; in this respect, they differ from consumer durables such as vehicles… blah blah”. This assumption conveniently ignores the 30-year bull market in real estate is almost entirely driven by the Fed and interest rates. Regardless, the BLS is arguing houses are assets, not goods to be consumed. Sure, I guess. What about renters? What about first-time homebuyers? You know, young people and the lower/middle class.

I don’t want to spend too much time arguing with myself about OER. Instead, I decided to make one simple change to the data this month. What if I replaced Shelter (made up of 98.5% rent) with the actual market rental data from Zumper? I scraped the city level data down and calculated a weighted average MoM change of 2.1% and a YoY average of 8.3%. This is only slightly above the Shelter figures from the BLS showing .3% and 3.2% respectively.

Unfortunately, Zumper is not publishing this data consistently enough to do a full replacement, so the modification only occurs in the most recent month. I think the charts and tables below tell the story though.

Let’s start with the month-over-month figure. Originally reported at .41%, the number jumps to .97%! More than double the rate in a single month!

Figure: 1 Month Over Month Inflation

The year-over-year chart below also shows a pretty significant change as well. 5.4% becomes 7.1%! This isn’t more than double like the MoM, but 7.1% is WAY above the Fed target of 2%. 3.5 times higher to be more precise. So, is this transitory? A look at the charts from Zumper would convince even the true believers that this trend definitely does not look transitory.

Figure: 2 Year Over Year Inflation

The plot below compares the recent numbers with the year-over-year monthly average. The current Shelter value is 3 times the size of the trailing twelve-month (TTM) average. I would be remiss if I didn’t point out that Food is more than double the TTM and is using actual BLS data.

Figure: 3 MoM vs TTM

The table below gives a more detailed breakdown of the numbers. Most importantly, it shows the weighted impact of each category on the total number. The MoM Shelter number has a whopping .68% impact on the .97% total. The BLS MoM originally had an impact of .13% (not shown). The Zumper number has a 5 times greater impact!

From a year-over-year perspective, the impact is 2.76% (not shown). This is more than double the BLS weighted value of 1.04%.

Figure: 4 Inflation Detail

So Why Now? (pardon the rant)

As a data person, the first thing I do is reconcile all my data with a second source. That being said, the articles I post use data sources that I do NOT validate. The data I pull (Comex, US Treasury, BLS, Fed, etc) comes from places with armies of data analysts and statisticians. These organizations are held in such high regard that TRILLIONS of dollars are traded on the information they produce each month.

Who am I to question their methods and outputs? Alas, I must go against my nature and take their data as gospel. Even when I know the data looks off or doesn’t seem right… I still take the data and analyze it as if it were the absolute and complete truth. I know the data has issues, but I do not have the time or resources to produce my own data for reconciliation.

Usually, I can do this without much guilt, this month I couldn’t take it anymore. Next month, and the months after… I’ll report their numbers as if it were the only truth, but for one month I took a different route! I did not challenge ALL the data, heck, I didn’t even challenge some of the data. No, no, no… I am challenging ONE single data point with a source directly from the market.

OER has been stuck around 2-3% for the last 12 months. The data discrepancy became so egregious that I could not just report their bogus number and point out how “transitory inflation” is definitely not transitory. I made one, teeny tiny little adjustment to the calculation. The results are simply laughable. The true CPI more than doubles MoM and is 170Bps higher YoY. Let me repeat, the CPI that the Fed, all of Wall Street, and the ENTIRE WORLD trade upon moves by over 30% by replacing a SINGLE data point that is CLEARLY more accurate than the BLS reported number.

The conversation from here can go in 1,000 different directions. Instead of chasing all those rabbit holes, I ask you one simple thing: I simply switched ONE number. What would happen if the rest of the CPI was calculated using ACTUAL market data? What is the real CPI?

I know, I know, you don’t need some data analyst telling you all this. You know the truth. Everyone knows the truth. We have NEVER had a deflation problem. For decades we have had an inflation problem. The government just doesn’t measure it properly. And do you blame them?!? They have ZERO incentive to measure it properly when the public actually buys their bogus number.

Unfortunately, next month I will go back to being a good steward of the State and report their numbers exactly. Yes, I don’t trust them, but that is what the market accepts. For this month, I couldn’t ignore it any longer. However, from now on, when you hear about “transitory” inflation and the grave risks of deflation, just remember what happens when substituting a single variable from the BLS calculation.

Now, I know what you’re thinking (or should be thinking)… ahhh it all makes sense! This is why millennials struggle to find affordable homes, this is why child care has become so expensive that people cannot afford more kids, this is why college is leaving young adults straddled with hundreds of thousands of dollars of debt, this is why our generation will be the first generation in American history that is worse off than the previous generation, this is why the wealth gap keeps growing and growing, this is why minority and underprivileged communities keep falling behind, this is why…

But wait, are you connecting all those dots? Can you see the complexity of all these issues being boiled down to one simple obvious fact? Inflation has been WAY higher than reported for decades! Yes: regulation undercuts businesses, student loans have destroyed our educational system, politicians mess up everything they put their hands on, DC has become a swampy mess of political showmanship, politicians don’t care about anything or anyone but themselves.

But buying votes and playing politics has always been the game of governments. Can you see the true corruption that stands behind all of this? The vicious hidden tax built into inflation? Can you see the villain in the room?

Yes, you got it right! It’s none other than the blessed Federal Reserve.

Please see the truth, and let’s END THE FED!!!!!

In the meantime, maybe consider protecting yourself with precious metals.