There’s Good News On Inflation If You Know Where To Look

If inflation were on its way down, would the Federal Reserve notice?

By design, the central bank’s preferred inflation measure, the core consumer price index, is backward looking. It shows how prices changed rather than where they’re going. A more predictive gauge is needed for the Fed to get the soft landing it wants.

Harvard economist Jason Furman, who was chair of the Council of Economic Advisers under President Barack Obama, used Twitter to propose a solution.

Furman’s idea, prompted by a suggestion from fellow economist Paul Krugman, is a new index that tweaks the housing component of core CPI. Housing, as you might expect, is the most significant element of the index, with a weight of 40%.

The Bureau of Labor Statistics tracks the cost of shelter using all rents. That means it looks at leases already in effect or, somewhat subjectively, what homeowners would expect to pay if they wanted new digs.

Instead, Furman swapped out that data for new rents, or “current asking prices” in civilian terms, as calculated by Zillow. This gauge shows a steep decline in the three-month change of core CPI since hitting a peak in July 2021.

“The housing market has cooled down a lot, but the official numbers that show everyone’s rent aren’t showing that yet,” Furman told Forbes. “The official data underreported the speed up and is underreporting the slow down right now.”

That has big implications for what the Fed does next.

“If we had paid attention to this in 2021, we probably would have raised rates much sooner,” Furman tweeted. “Over the next 6 months it is likely to show faster progress on inflation.”

That said, Furman isn’t suggesting the Fed scrap its measure.

“I think it would be good for the government to report both,” Furman told Forbes. “The BLS number is good for measuring the living standard today versus a year ago. If you want to look forward, it’s a little bit better to ask about the people whose leases changed. For the Federal Reserve and economic forecasters, it’d be better to have something to help them predict.”