Jun 9, 2022 - Economy

New research says inflation is rising faster than data suggests

Illustration of a large dollar bill sign balloon being held by a man who is floating slightly off the ground.

Illustration: Aïda Amer/Axios

Get ready for new inflation numbers. The release of the Consumer Price Index has become one of the key dates on each month's economic calendar, the source of new evidence showing how severe the inflation problem is, and how far the Federal Reserve might have to go to quash it.

Driving the news: This month's number — due out at 8:30am ET on Friday and expected to show 0.8% overall inflation in May — comes amid an important debate over how to compare today's numbers to the past.

Why it matters: The Fed is trying to engineer a pullback in inflation akin to what Paul Volcker managed in the early 1980s — but without a Volcker-esque deep recession. New research suggests that may be harder than it sounds.

State of play: A new working paper out this week from Marijn A. Bolhuis, Judd N. L. Cramer, and Lawrence H. Summers (yes, that Larry Summers) presents evidence that if measured the way it was in the 1970s, CPI is rising faster today than the headline 8.3% over the last year would suggest.

  • That implies the Fed has a harder job ahead of it in trying to bring that number down to something close to 2% and increases the odds it will take a recession to do the trick.

The details: The working paper notes that until 1983, CPI included housing costs by looking at the cost of buying a home with a mortgage. Now, housing costs are included by looking at the equivalent a homeowner would have to pay to rent their own home.

The result: In the 1970s and early 1980s, skyrocketing interest rates made reported inflation look higher because higher mortgage rates increased the cost of buying a house.

  • By the authors' calculations, if you adjust the late 1970s/early 1980s inflation numbers using current methodology, inflation then was more closely on par with today, not much higher.

By the numbers: Again using current methodology, CPI peaked at 9.1% in that era, the authors find, not the 13.6% official number reported for the 12 months ending in June 1980.

Yes, but: There are important differences between then and now. The inflation of the early 1980s built for 15 years or so and featured a clear upward spiral of wages and prices. That isn't in evidence now.

  • Moreover, CPI is an inflation measure that the Fed pays lots of attention to but isn't what it targets. The personal consumption expenditures price index, which handles housing prices differently, is what the Fed focuses on more intently.

The bottom line: A hot inflation print tomorrow morning would be bad news, but maybe not as worrying as the new research implies.

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