02/14/24 09:07 AM EST

CPI Perception vs Reality

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

One of the biggest challenges with CPI is perception vs reality, and then the Fed's perception of reality as our reality. If you missed it, CPI has dipped to 3.1%, higher than the estimated 2.9%, but down from the previous 3.4%. However, the core CPI, which excludes food and energy prices and is dominated by the lagging shelter metric, is holding firm at 3.9%. The 3-month annualized CPI actually increased to 4%, up from 3.3%, and a 6-month annualized CPI rose to 3.7%, up from 3.2%.

The significant month-over-month rise of 7.6% in shelter costs, which heavily influences the overall CPI due to its substantial weighting, casts doubt on the real-world applicability of these figures. Questions arise about whether new rental contracts genuinely reflect such steep increases.

The Bureau of Labor Statistics (BLS) process for measuring inflation metrics, particularly the calculation and influence of Owners' Equivalent Rent (OER) on the CPI, is facing criticism and calls for an overhaul. The BLS has acknowledged these issues, as evidenced by their publications discussing potential reforms. Our own ProfPlum has been pointing out these errors for a very long time, and it's only lately becoming evident we have a problem with the data. The concern is this error becomes the anatomy of a Fed policy mistake.

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