September 11th, 2024 - Volume 10 (2024), Missive 207 (Wednesday)
Durable goods price volatility the reason why “inflation” seemed so bad
CPI less shelter unchanged again in August
Service price model not equipped to reflect the current volatility
When it comes to the illusion regarding inflation in recent years, the foundation of that perception really lies with the price volatility of durable goods. Using the current base year of 1982-1984 =100, durable goods prices increased some 24.8 percent during its most recent upward spike. This is very close to the last time consumer durable goods price rose. In fact, back then, the index increased 25.9 percent from beginning to end. The very stark difference, of course, was that back then the increase took over 13 years to peak from its bottom, wherein the latest spate of price increased came over barely two years. As we’ve written this past week, durable goods prices are reliable and readily available, but also subject to extreme bouts of volatility. That is clearly the case these past few years. Sheepishly mistaken for price inflation, the rapid growth in consumer durable goods prices is actual the wolf of price volatility, which, thanks to the surplus productivity-led widening of the output gap, has torn apart any semblance of price stability in the U.S. economy. As a result, price indexes like that of today’s CPI, are going to have a difficult time, outside of the durables, reflecting what is really going on in the broader price environment.
This is price volatility, not price inflation.
Arguably the biggest flaw in CPI right now is the inability to correctly gauge the cost of shelter in an increasingly volatile price environment. Written many times here and elsewhere, the cost of shelter calculation, based in the methodology of owners’ equivalent rent, simply isn’t able to adjust for wild swings in prices. August’s results certainly were no different as CPI excluding shelter was
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