Alan Reynolds on “Shelter Prices” and Inflation

Alan Reynolds writes:

Consumer price index (CPI) inflation has been zero for two months. Over the past twelve months, food prices at home have risen by 1.1 percent, and energy prices by 1 percent. Yet headlines continue to focus on 12-month averages of 3 percent for headline CPI and 3.3 percent for “core inflation” (less food and energy). But there’s a big problem: These 3 to 3.3 percent figures don’t reflect a broadly defined measure of inflation, as they are largely dominated by the cost of shelter.

Lots of criticism Bureau of Labor Statistics (BLS) estimates of rent and owners’ equivalent rent (a price no one pays) account for a third of the total CPI and more than 40 percent of the core CPI.

Reynolds points out that extreme shelter price estimates are also problematic for another reason: they lag reality by twelve to eighteen months. Since there is a delay, we obviously don’t know what happened to prices in recent months.

But without shelter prices, inflation has been low. Reynolds writes:

Here’s the unreported good news: In addition to shelter, CPI inflation and core inflation have risen only 1.8 percent over the past twelve months and have remained flat or fallen over the past two months. (bold in original)

What he means, of course, is not CPI inflation and core inflation rose only 1.8 percent over the past twelve months; he means CPI inflation and core inflation goods only 1.8 percent over the past twelve months.