Time for a Broader View as Inflation Ticks Back Up to 6.4%

Following a 0.1% increase in December, the CPI data for January showed an unexpectedly high 0.5% gain. As a result, the 12-month inflation rate was 6.4%, exceeding estimates but still down from the 6.5% inflation rate in December.

Top US economist and managing director of global macro at TS Lombard, Steven Blitz, stated,  “January CPI data make clear that inflation is not dropping to 2% without a recession raising unemployment above 4.5% and this underscores my long-held view that the Fed erred by downshifting hikes.”

According to Jeffrey Roach, chief economist for LPL Financial, “inflation is easing, but the path to lower inflation will not likely be smooth.” He says the Fed won’t make any hasty decisions based on a single report, but it is becoming increasingly likely that inflation won’t slow down quickly enough for the Fed. The University of Michigan’s benchmark survey shows long-haul inflation expectations remain set at 2.9%. This supports the idea that the Fed will raise interest rates by 0.25% at its next meeting rather than switching to larger increases.

These are two radically different views. A problem is that the inflation calculation method has undergone some revisions thanks to the Bureau of Labor Statistics. High housing costs have been a significant factor in the calculation of inflation. The Owner’s Equivalent Rent (OER), which represents what homeowners would typically pay if they weren’t constrained by longer fixed home loans, increased starting in January 2023.
The Bureau stated in 2020 that rent inflation for different types of housing units occasionally diverges, even in the same neighborhoods. That being said, they estimate that between 2013 and 2016, apartment rentals in the United States exceeded rents for detached homes by 0.75 percentage points per year after correcting for location effects.However, as energy costs began to decline, shelter—the category that includes OER as well as apartment rents—became the main driver of increased inflation. That translates into more inflation in January 2023 than it would have under the former model.

 

In an email, senior economist Dawit Kebede of the Credit Union National Association (CUNA) stated that the rise in property prices was responsible for half of the monthly increase.  . “Its contribution to core consumer price index (CPI), excluding food and energy items, is even higher at 60%. The index for housing is a lagged indicator in measuring the CPI relative to current market trends. If this index stayed sideways in January, inflation would have slowed in line with expectations. The CPI is expected to reflect current market declines in housing prices in the second half of the year.”

The human knowledge of a second problem is more pervasive. People search for change even if, statistically speaking, doing so is a surefire path to some form of insanity. The statistical process control and management community cautions against making decisions of this nature. Reacting to every change makes behaviors erratic and is analogous to a rider who doesn’t saddle up firmly. Your experience as a result of the bounces will stay in your memory for a while.Inflation in the U.S. has been reducing for months, and we expect that it will continue to decline to more usual levels through the first half of 2023, said Carlos Vaz, founder, and CEO of CONTI Capital, a multifamily investment company. At the following FOMC meeting in March, the Fed is expected to raise interest rates by an additional 25 basis points because inflation is still running reasonably high and the labor market isn’t showing many signs of a big downturn.