Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Halloway. Tracy last month's
Speaker 1: inflation number, and I guess it was just a disappointment, right,
Speaker 1: because two months ago it was this cool number both
Speaker 1: on headline core, like maybe the turn is finally here,
Speaker 1: and then last month it was like, no, straight back
Speaker 1: up again. How many words did you write about why
Speaker 1: people should be focused on month on month versus year
Speaker 1: on here? I still think that from an investor or
Speaker 1: standpoint or just someone trying to understand you account clearly
Speaker 1: like the sequential numbers are more telling. I wasn't, Tracy.
Speaker 1: I resent the insinuation that you think I would write,
Speaker 1: so I would never insinuate anything, Okay, but you're right, Okay,
Speaker 1: So people were expecting inflation to start to slow down
Speaker 1: a little bit, and that's why there was lots of
Speaker 1: talk about why you should look at the sequence whole
Speaker 1: month on month data versus the year on year. But
Speaker 1: what we saw instead was basically, any way you slice
Speaker 1: the data, it looked disappointing. And where you going to
Speaker 1: defend month on month again? No, no, of course, I
Speaker 1: was just gonna say, ironically, the one the only measure
Speaker 1: that looked good was the completely unsliced headline data because
Speaker 1: that was so far dragged out, but the moment you
Speaker 1: did even the slightest bit of product under headline was like,
Speaker 1: oh my god, raging hut. All right. Well, the I
Speaker 1: think the big takeaway from that number, other than it
Speaker 1: being disappointing, was the fact that we really see some
Speaker 1: of these price increases starting to spread from things like
Speaker 1: food and energy and more towards services. And services, as
Speaker 1: everyone is now finding out, is a big, big part
Speaker 1: of the core index. And I guess everyone called this
Speaker 1: to like, I think last year they're like, oh, we're
Speaker 1: gonna have this big shift to services and yeah, sure,
Speaker 1: good prices will come down and bull whip effects and
Speaker 1: inventories and all that. But now it's here and it's like,
Speaker 1: oh man, this could be here for a while and
Speaker 1: it's not slowing down yet. Yeah, And I think the
Speaker 1: big question is how long does it take to feed
Speaker 1: into the index and how long does it take to
Speaker 1: kind of go away? And there are different data points,
Speaker 1: and there's been some discussion of this as well. There's
Speaker 1: private market data points, for instance, that show rents are
Speaker 1: starting to slow, so when does that feed into CPI? Right, So,
Speaker 1: various online companies like a Zillo or something, they'll have
Speaker 1: a rent index. And this sort of gets to the
Speaker 1: question because, first of all, the thing that one of
Speaker 1: the big upward drivers of inflation and the last report
Speaker 1: was rent. Everyone most people feel rent. It's like a
Speaker 1: very salient category. There are some categories that maybe are
Speaker 1: more hidden. Rent is not one of them. Shelter is
Speaker 1: not one of them. But then yes, there is this thing.
Speaker 1: So it's like, Okay, we have these private measures that
Speaker 1: seem to be rolling over a little bit, but the
Speaker 1: numbers in the CPI keep going up. So is this
Speaker 1: the case where the CPI is just lagged like bad
Speaker 1: data or is it people are misunderstanding the relationship between
Speaker 1: the official government numbers and what some of these private
Speaker 1: surveys are ship Today we're going to be digging deep
Speaker 1: into those numbers, right, absolutely, So let's get right to it.
Speaker 1: We have the ultimate guest for digging into inflation numbers,
Speaker 1: and he knows more about like what these numbers actually
Speaker 1: mean and how they're derived. I think you've talked to
Speaker 1: him several times, and you're reporting on like the minutia
Speaker 1: like you when you did like mayonnaise reporting, It's like, Okay,
Speaker 1: where is this in which index? And how much of
Speaker 1: this is like soy oils versus condiments? Like he knows everything.
Speaker 1: The way we measure inflation never ceases to amaze me.
Speaker 1: And there's just so much to say about the actual
Speaker 1: construction of the indicries and things that people don't normally
Speaker 1: talk about but we probably should. Let's talk about them.
Speaker 1: We're gonna be bringing back to the show a past guest.
Speaker 1: O'mar Sharif is the president and founder of Inflation Insights,
Speaker 1: and he will answer all our questions about why some
Speaker 1: numbers are going up maybe some hopefully that go down.
Speaker 1: So Ama, thank you so much for coming back on
Speaker 1: the show. What's going on? When is the numbers going
Speaker 1: to start turning down? This is I thought inflation was transitor.
Speaker 1: I made a whole like you know, I was like
Speaker 1: I was like on team Transitory. Now I look ridiculous.
Speaker 1: Um well, I think probably you know the turn of
Speaker 1: this year is because what I'm thinking is we're gonna
Speaker 1: start to see the monthly rate, especially the core, start
Speaker 1: to really kind of come off. I mean, we've been
Speaker 1: kind of stuck around point flat point six every month
Speaker 1: on the core pretty much for close to a year. Um,
Speaker 1: we haven't got a long relief, but I think that
Speaker 1: relief is coming from a few different areas, hopefully in
Speaker 1: the next couple of months. Okay, I'm gonna clip. It
Speaker 1: doesn't matter how long it takes. I'm going to claim
Speaker 1: victory in five years of inflation comes down. Great. Um, okay, well,
Speaker 1: maybe we can talk about one of the things that
Speaker 1: people expected to start coming down and it hasn't, at
Speaker 1: least according to um last month's data, and that's used cars.
Speaker 1: Car prices, and this was one of the big drivers
Speaker 1: of inflation actually, you know, going up over the past
Speaker 1: year or so. Why haven't prices come down? This is
Speaker 1: what everyone was expecting to happen. Yeah, so use car
Speaker 1: prices like a lot of things. Uh, you know, when
Speaker 1: prices cool sale prices are going up, they are just
Speaker 1: very quickly on the way up. When they are coming down,
Speaker 1: they take a little hell to come down. And so
Speaker 1: what we've seen, honestly all year long is that wholesale
Speaker 1: prices are down very, very sharply. You want to look
Speaker 1: at Manheim Black Book data and JD Power, which is
Speaker 1: sourced data. Actually for the BLS um all of these
Speaker 1: things that are down, you have ten and eleven twelve
Speaker 1: percent depending on the indext over the last six seven months.
Speaker 1: Retail litt on the other hand, has been kind of
Speaker 1: roughly flat because a lot of sellers are not really
Speaker 1: pulling down the crisis. But we're starting to see that change,
Speaker 1: and really over the last six or seven weeks, I
Speaker 1: would say that that is starting to adjust. So model years,
Speaker 1: you know, two year old models, three row models for
Speaker 1: those prices and retail prices are coming down. You can
Speaker 1: see this in the BlackBook Retail Index, for example, prices
Speaker 1: were down about two and a half percent in August.
Speaker 1: So all we're really waiting to see is that data
Speaker 1: translate into the CPI and the next we use cars
Speaker 1: and I think, you know, September it is a good
Speaker 1: point where that might enter, but I think October is
Speaker 1: probably the month you really want to focus on. September.
Speaker 1: There's a lot of adjustments that are happening in September,
Speaker 1: but September October, I think is when you really are
Speaker 1: going to start to see the retail stuff on these
Speaker 1: cars in next start to come come off in the
Speaker 1: CPI and that that's going to be a big boon
Speaker 1: in terms of you know, getting that core weight quarter
Speaker 1: and next lower. How do you actually go about, because
Speaker 1: this is your day to day business, how do you
Speaker 1: go about trying to measure that lag between you know,
Speaker 1: what we see in the market and what we actually
Speaker 1: see showing up in the CPI data. First of all,
Speaker 1: you're looking at these market industries, you know, whether it's
Speaker 1: span Him or Black Book, and you're essentially mapping them
Speaker 1: is at the wholesale level against the retail price index
Speaker 1: for the CPI UM. Now, obviously wholesale, you know, typically
Speaker 1: defined as the strongest correlations, will be with wholesale changes
Speaker 1: feeding roughly about two months later into the CPI. Now
Speaker 1: what's really interesting is like before the pandemic, this was
Speaker 1: pretty much a constant roughly a two month lag, so
Speaker 1: eight weeks later, whatever happened wholesale typically showed up in
Speaker 1: the CPI. What the pandemic did was completely throw these
Speaker 1: lags off to the point where you know, prices started
Speaker 1: moving at the wholesale level, obviously they're going up, and
Speaker 1: that immediately fed into retail like there was no lag whatsoever,
Speaker 1: and if you're one of five six percent of wholesale
Speaker 1: one month, guess what the CPI was going up five
Speaker 1: pc and use cars the next one. Now, what we're
Speaker 1: seeing now, I think is a little bit of a
Speaker 1: reversion to that, um, you know, the old lag of
Speaker 1: about to shoot three months. And that's why I think.
Speaker 1: You know, we've seen wholesale come off the last several months,
Speaker 1: and people are saying, we wait, it's like on the
Speaker 1: CPI use cars index is you know, kind of unchanged
Speaker 1: or maybe up a little bit. So I think it's
Speaker 1: it's just the issues that the lags are are kind
Speaker 1: of back to what they were. This is sort of
Speaker 1: like gasolute. You know, when gasing prices go up and
Speaker 1: wholesale level you feel it right away, and you see
Speaker 1: it right away at the pub when they go down,
Speaker 1: it's a very gradual decline, right you're kind of pocketing
Speaker 1: that extra margin. And I think dealers are doing the
Speaker 1: same thing and happened for a while. But I think
Speaker 1: that jig is up and should be over the next
Speaker 1: couple of months. So let's talk a little bit more
Speaker 1: about this. And you know, I'm starting to like feel
Speaker 1: a little bit better about always big wrong on everything
Speaker 1: because I just got these measures, right, I look at trucking,
Speaker 1: look at cars, I look at the triple A gasoline.
Speaker 1: It's like, look, all these lines are going down. They
Speaker 1: should show up. Can you talk a little bit about
Speaker 1: why these legs exists, What is the difference between some
Speaker 1: of these measured prices and the government prices and what
Speaker 1: do you have any theories or sort of explanations why
Speaker 1: past lags got disrupted? And so that the gap between
Speaker 1: private survey measures of prices versus what showed up in
Speaker 1: government data did not have the same temporal relationship as
Speaker 1: it used to prepand the temporal is a good word. Yes,
Speaker 1: I would I would talk about this with using you
Speaker 1: know it'll go back to use cars. Yeah. One is
Speaker 1: you know that in terms of the pandemic when it
Speaker 1: hit um, what you had was basically a complete disruption
Speaker 1: in the use cars marketing. So it wasn't just that
Speaker 1: people demanded use cars because I say they were moving
Speaker 1: in suburbs or whatever. The biggest ship was You've had
Speaker 1: a natural seller in the used cars market. Car companies
Speaker 1: who became a net buyer used to vehicles and we
Speaker 1: really haven't seen that before. And what they did was
Speaker 1: they scooped up all the zero to three year models
Speaker 1: that they could to sort of replenish their stock. Um,
Speaker 1: you know, things came back a lot stronger obviously twenty
Speaker 1: one that people thought. So take a company like Davis.
Speaker 1: They had about four hundred fifty thousand vehicles in their
Speaker 1: fleet in two thousand. That got down to about two
Speaker 1: d ninety thousand by the summer one, right when demand
Speaker 1: was booted, So they couldn't replenish them for manufacturers. They
Speaker 1: ended up going to the use cars market. So what
Speaker 1: you found was pricing increases in the zero three year bucket,
Speaker 1: which is all build buy those price increases skyrocket and
Speaker 1: if you're a dealer trying to buy a car, you
Speaker 1: can't find these vehicles and you need to go out
Speaker 1: by four or five six yelds. So all across that age,
Speaker 1: current prices spiked and it wasn't you know. I think
Speaker 1: the issue is just the magnitude was so large that
Speaker 1: you could really wait to price them out a retail right,
Speaker 1: So you're paying way way more than you were used
Speaker 1: to pay, and you had to pass that on a quickly. Uh.
Speaker 1: And so I think we saw those lads disrupted for
Speaker 1: that particular decide. Now on the way down, wholesales is
Speaker 1: getting a lot cheaper, you can still sell it for
Speaker 1: a bit more on the retail side. So again, just
Speaker 1: like athlete, you kind of pocket the margins as long
Speaker 1: as you can on the way down. And I think
Speaker 1: that's what you're seeing. The other item I would actually
Speaker 1: mention where honestly I am, I'm pretty stumbdusted. What's going
Speaker 1: on is really furniture prices. Um. You know, we have
Speaker 1: seen you talk about, you know, trucking rates going down, um,
Speaker 1: import prices of furniture going down. Inventories are jumped, while
Speaker 1: the big box retailers are telling you, you know, Walmart, Haargey,
Speaker 1: we've got too much of the stuff that we're discounting heavily,
Speaker 1: and yet the CPI is going up about one percent
Speaker 1: you know, every single month. Um. And there, you know,
Speaker 1: typically you would start to see the stuff coming through
Speaker 1: pretty quickly. I've honestly been winning since March or April
Speaker 1: for furniture to really slide, and it just continues to
Speaker 1: sort of defy, um, defy expectations. So there, I don't
Speaker 1: have as good as an answer in terms of what's happening,
Speaker 1: but we know all the signs are planning to the
Speaker 1: fact that they should be dropping, and the industry will
Speaker 1: tell you that. I mean, you read any furniture industry
Speaker 1: trade publication like I started doing when I was wrong
Speaker 1: on furniture for a while, Um, you know, furniture to
Speaker 1: a magazine will tell you, hey, they're preparing for recession.
Speaker 1: They've got too much stuff, they're discounting, orders are declining,
Speaker 1: and yet the CPI is that showing it. But I
Speaker 1: will say one other thing to think about is some
Speaker 1: of these samples in the CPI are not that large furniture.
Speaker 1: If you're talking about bedroom furniture, they may only have
Speaker 1: a couple of hundred quotes in the entire sample versus
Speaker 1: you know, thousands for something like rent um or you
Speaker 1: know thousand for airfare. So the smaller sample, the larger,
Speaker 1: you know, the chance that you'll have some some errors,
Speaker 1: you might miss some of the price changes, you know,
Speaker 1: particular much so that can also impact the lads that
Speaker 1: occur in the CPI. So, I mean it is true
Speaker 1: on the whole, the goods inflation has been going down.
Speaker 1: So I think it fell from like ten points seven
Speaker 1: you know last year to seven point one last August.
Speaker 1: And meanwhile, services, as we mentioned, is starting to pick
Speaker 1: up and services correct me if I'm wrong, but I
Speaker 1: think it's something like triple the weight in the core
Speaker 1: indux something like that. Can you walk us through, like
Speaker 1: a why do services get that much weighting and be
Speaker 1: how significant is it for the core index that it's
Speaker 1: now going up? Yes, so, I mean the bulk of
Speaker 1: that weighting is is Shelter. It's it's rent and its
Speaker 1: owner's equivalent rent um. You know, in the core CPI,
Speaker 1: where do you present the entire core is just rent?
Speaker 1: You know, we are combined and so within services, you know,
Speaker 1: the bulk of the weight is coming from from Shelter.
Speaker 1: So that's really what's driving UM that overweighting, if you will,
Speaker 1: to services relative to two goods. The fact that it
Speaker 1: is going up so dramatically, you know, that's obviously been
Speaker 1: an issue for the core UM. I would really say
Speaker 1: probably since since early spring when Shelter really started to accelerate. Now,
Speaker 1: you know, one thing I want to mention UM is
Speaker 1: that we I think the Shelter story, honestly is something
Speaker 1: that most people knew was gonna happen coming into this year, right,
Speaker 1: you mentioned some of these private market in the seas
Speaker 1: like apartment lists and Zillo and so on. They were
Speaker 1: showing these huge games and rents, you know, late last year,
Speaker 1: last spraying, last summer, so we knew that this was
Speaker 1: likely going to enter in the CPI this year. The
Speaker 1: question was always about magnitude, so whether it was going
Speaker 1: to be up six percent this year or seven percent,
Speaker 1: which looks like we're headed for that some number. Um.
Speaker 1: So to me, like, that's not really a surprise. On
Speaker 1: the services side, I think most people who tracked this
Speaker 1: stuff closely realized, hey, reds are gonna be up a
Speaker 1: lot this year, probably someone in the six summers a range.
Speaker 1: It's the other part of services and the non shelter
Speaker 1: service stuff that I think is the more interesting part
Speaker 1: of the story, and they're what you'll find is a
Speaker 1: lot of people talking about how wages are driving those
Speaker 1: services up. Um, you know how um all of these
Speaker 1: other costs in the non shelter services, those are the
Speaker 1: sticky elements of inflation. And until that stuff starts to
Speaker 1: roll down, you know, it's gonna be really hard to
Speaker 1: get correflation down. I would actually sort of counter that
Speaker 1: a little bit by arguing that a lot of what
Speaker 1: you've been seeing, and this has been true since really
Speaker 1: last probably I would say fall, is we've had a
Speaker 1: lot of oscillation in that non shelter service employment, and
Speaker 1: that's mostly because of sort of the economy reopening and
Speaker 1: closing and kind of fits its first. So summer of
Speaker 1: twenty one, if you remember, airfare started to jump very significantly,
Speaker 1: started traveling a bit again. So a lot of what
Speaker 1: was driving services at that point was actually things like
Speaker 1: affairs and hotels. It wasn't medical care services, it wasn't
Speaker 1: recreation services, you know, it was really personal care services.
Speaker 1: It was these sort of reopening categories, if you will.
Speaker 1: Then you had you know, I think Delta was was
Speaker 1: later in that year. Prices for those categories spell the
Speaker 1: non shelter services inflation actually decelerate very sharply. So basically
Speaker 1: what you've seen up until really pretty recently, it's just
Speaker 1: this quarter to quarter oscillation that's been going on in
Speaker 1: the non shelter um services in next really just reflecting
Speaker 1: kind of the economy reopening and then slowing down. And
Speaker 1: we got the same dynamic to spring, by the way,
Speaker 1: when the airfare spite and now they've been down the
Speaker 1: last few months, and so the non shelter stuff is
Speaker 1: kind of moderating a little bit again. So let's talk
Speaker 1: a little bit more on rent specifically for two reasons.
Speaker 1: A because it is such a big part of uh,
Speaker 1: you know, core cp I, but also it's one of
Speaker 1: the most like people feel it and people complaining. Certainly
Speaker 1: in New York everyone is aware of just like how
Speaker 1: brutal the rent market is. But also elsewhere you mentioned there,
Speaker 1: we sort of had reason to think that this number
Speaker 1: was coming in part because the private surveys, We're flagging
Speaker 1: this several of like maybe even a year ago, the
Speaker 1: Zillois and all this. So for there reasons, one big
Speaker 1: question which is like, is the data stale? And at
Speaker 1: a time when people are worried about, oh are we
Speaker 1: going to create is the Fed going to create a recession?
Speaker 1: Is it being too aggressive? Uh? In light of you know,
Speaker 1: is it whatever? Is it operating on old data that's
Speaker 1: not as timely as what the private sector surveys are showing.
Speaker 1: Is the public data stale? So I wouldn't necessarily say
Speaker 1: it's scale. I would just say that it measures something
Speaker 1: different than what these private sector indussees are measured. So
Speaker 1: most of these private sector industries are measuring new leases.
Speaker 1: So when you think about moving into a new apartment
Speaker 1: beside a brand new lease, that's what they are capturing
Speaker 1: and capturing that change in the right for that unit
Speaker 1: with a new tenant versus whatever it ready for for
Speaker 1: for the last ten And that's true of all most
Speaker 1: of these apartment list of lists on and so it's
Speaker 1: really just one segment of um the market that those
Speaker 1: private private measures are capturing. The CPI is capturing the
Speaker 1: entire rental markets. So it's not just people who are
Speaker 1: looking for new apartments were signing new leases. It's also
Speaker 1: people who are renewing their lease, and it's also people
Speaker 1: who are currently renting and still all on the same
Speaker 1: lease they were, you know, five months ago. So they
Speaker 1: want to capture the entire market versus just a slice
Speaker 1: of the market. So in that sense, I don't think
Speaker 1: it's stale. Now that said, you know, when you think
Speaker 1: about is a FED operating on old day, we do.
Speaker 1: We do know that it lacks right before this very reason,
Speaker 1: it doesn't capture the BLS, doesn't capture turning points in
Speaker 1: the market as as well as these private sector measures. Right,
Speaker 1: if if something is changing in the marketplace, those new
Speaker 1: lease the way those new leases are changing is gonna
Speaker 1: be a much better indicator what's happening then than the CPNI.
Speaker 1: That's true. But it's not as if the Fed number
Speaker 1: one doesn't watch their private sector measures, not that you know,
Speaker 1: they don't understand the lags. I mean, if I understand
Speaker 1: the lags that rent and other people do, I promise
Speaker 1: you the folks that the FED do as well. Uh So,
Speaker 1: I don't think that they are you know, sitting here
Speaker 1: working on on the sort of lagging indicators if you will,
Speaker 1: because they are. They're capturing in a huge amount of
Speaker 1: data to look at what's happening in India shelter um
Speaker 1: and they also kind of see where shelter is likely head. Right,
Speaker 1: These private sector measures have started to roll over the
Speaker 1: last you know, depending which one you want to look at,
Speaker 1: four to seven months, they've been slowing down quite a bit.
Speaker 1: So another thing related to housing and the cost of shelter,
Speaker 1: which again it seems important because of the way and
Speaker 1: just how much, not how important it is for the public.
Speaker 1: We have seen a clear slow down in anything related
Speaker 1: to home buying and home purchasing, and of course that
Speaker 1: isn't I don't believe is that captured directly historically speaking?
Speaker 1: Is there a relationship or a stable relationship between activity
Speaker 1: and the home purchase market. The price of a house,
Speaker 1: the price of a monthly mortgage, which is shot up
Speaker 1: if you're just if you're buying a house today verse
Speaker 1: a year ago, and then what feeds through into rent prices?
Speaker 1: Can I just say that was going to be my
Speaker 1: next question. We've been working together so long, we always
Speaker 1: do that, We keep asking the same questions, But can
Speaker 1: I tag onto that? So one thing I've heard is
Speaker 1: there are some people who say that, like interest rates
Speaker 1: going up could end up increasing the pressures on rent
Speaker 1: because more people decide they're not going to buy houses right,
Speaker 1: They're going to stay where they are, keep renting an
Speaker 1: apartment and things like that. Yeah, so on that latter point, yes,
Speaker 1: that's that's very possible. Um, you know, if it's getting
Speaker 1: too expensive to get a mortgage, or you can't find
Speaker 1: a house to buy, you renew your lease, or you
Speaker 1: you know, are moving into the apartment, that certainly can
Speaker 1: actually push rents up in the short term until supply
Speaker 1: does eventually catch up. But yeah, that's that's very possible.
Speaker 1: We've seen that happen before. Uh, in terms of the
Speaker 1: idea of you know, the housing market and and her
Speaker 1: versus activity. It really is kind of what you're talking about,
Speaker 1: which is the knock on effect on the rental market.
Speaker 1: That's really the way it's going to feed through into
Speaker 1: the rent index because you know, contrary to popular belief, like,
Speaker 1: house prices don't play any role whatsoever in the CPI
Speaker 1: at all, um, even though owners Equivalent Rent Index, you know,
Speaker 1: it's not intended to measure house prices. It basically is
Speaker 1: using the contract rent data that they capture and sort
Speaker 1: of you know, rejiggering it a little bit to to
Speaker 1: come up with with, oh, we are but no house
Speaker 1: price goes into the index whatsoever. The mortgage inter stuff,
Speaker 1: you know, it used to actually be in the CPI
Speaker 1: prior to nineteen eighty three because they just it was
Speaker 1: a very different methodology back then, UM. And so when
Speaker 1: when rates were moving higher and the cost of servicing
Speaker 1: your mortgage moved up, that price actually was reflected in
Speaker 1: the CPI back in the day. Um. But in nineteen
Speaker 1: eighty three, there was a lot of different problems with
Speaker 1: it um and they ended up switching out to this
Speaker 1: new method of rental equivalence in net eight three. So
Speaker 1: now that doesn't really play play much of the role
Speaker 1: again other than the knock on effect on the rental
Speaker 1: market in most houses. Is that how Vulcar defeated inflation
Speaker 1: removing mortgage trains from It's like, we want to raise
Speaker 1: rates to fight inflation, but our current measure of inflation
Speaker 1: includes mortgages. Got to change the rules because otherwise our
Speaker 1: rate you can regime won't help us at all. So actually,
Speaker 1: in that instance, because of the rate increases, mortgage interest
Speaker 1: costs in the CPI skyworketed and actually the inflation higher.
Speaker 1: So even though he was boost in rates at the
Speaker 1: same time you would think, okay, high rais you should
Speaker 1: or inflation. In fact, inflation was moving higher partly because
Speaker 1: mortgage interest costs were so much higher, and there was
Speaker 1: a lot of problems with the idea of mortgage interest costs.
Speaker 1: I mean, they knew about mortgage interns costs, and the
Speaker 1: problems with sort of putting it into a cost of
Speaker 1: living index. A lot of what you you know, a
Speaker 1: lot of issues that people have with the CPI, whether
Speaker 1: it's rents or other indexes is really about the constant
Speaker 1: of how you design it, how you think about what
Speaker 1: you should be capturing, and that fundamentally gets back to
Speaker 1: the idea of you know, what is the purpose of
Speaker 1: the CPI, and it's intended to be a cost of
Speaker 1: living index UM And you know, they knew back I
Speaker 1: think it was in seventies they had papers out the
Speaker 1: b LS saying, look, we need to get away from this,
Speaker 1: you know, mortgage interest costs because it doesn't really fit
Speaker 1: the way that we're supposed to construct a CPO. You know,
Speaker 1: you could do a whole separate episode on that, but
Speaker 1: I think the short version is in three in eight
Speaker 1: three they decided to say, hey, we've been talking about
Speaker 1: this rental equivalence method for many years now, and we
Speaker 1: think it's the right way to do it. By the way,
Speaker 1: I will just say, very recently, UM National Caademy of
Speaker 1: Sciences basically put out a report that said, you know,
Speaker 1: here are our recommendations for improving the CPI in the
Speaker 1: coming years. And they talked about looking at, you know,
Speaker 1: these private measures of rent as potentially trying to incorporate
Speaker 1: them into the CPI. But they said up until then
Speaker 1: the best measure that we have is really the rental
Speaker 1: equivalent method that we use today. Um, let me ask
Speaker 1: a slightly less provocative question, um, other than how we
Speaker 1: measure or don't measure mortgage interest in CBI. So historically,
Speaker 1: one of the reasons we focus on rents is because
Speaker 1: people feel them. Um, they're a big component of the
Speaker 1: of the core index. But also because rents and wages
Speaker 1: tend to be tightly linked. And I think there's concern
Speaker 1: that as rent inflation accelerates, are we going to see
Speaker 1: that knock on effect into wages. What are you seeing there? Yeah,
Speaker 1: as you said, it is a pretty tight fit. I mean, basically,
Speaker 1: I would saying labor income and and rent growth are
Speaker 1: are pretty tightly correlated. Um. You know again, I think
Speaker 1: as rents have gone up, they correlated well with this
Speaker 1: improvement in wage growth. One of the interesting sort of
Speaker 1: tickets is that a lot of even though rents are rising,
Speaker 1: a lot of people who are reapinger pleases are actually
Speaker 1: or side new leases in you know, sort of more
Speaker 1: profess she manage department buildings. So more of your large
Speaker 1: multifamily in the buildings are actually showing that their incomes
Speaker 1: have increased pretty significantly over the last two years. So
Speaker 1: even though we talk about you know, the idea of
Speaker 1: a lot of people getting priced out because rents are
Speaker 1: rising so sharply, people who are citing new leases and
Speaker 1: having to provide the paperwork from their bank statements or
Speaker 1: or you know, their their employment information are showing that
Speaker 1: incomes have actually also increased pretty significantly. And so I think,
Speaker 1: you know, as you start to see wage growth decelerate
Speaker 1: a little bit, which is already starting to happen at
Speaker 1: the margins um. You know, people who manage these apartments
Speaker 1: sort of they get this kind of real time flow
Speaker 1: of what labor income looks like. And I think that's
Speaker 1: partly also why you odesty rents start to decelerate is
Speaker 1: because they're not reasoning rent six percent when they see
Speaker 1: labor income only. Yeah, let's say it's where did you
Speaker 1: get where's that data from? That the people that the
Speaker 1: cohort that is turning new leases is actually seeing wage
Speaker 1: games that are keeping up with rent. Yeah, and that
Speaker 1: comes from real page um. And that's another you know,
Speaker 1: large sort of private market provider of everything from rent
Speaker 1: data to all sorts of information on multiply buildings. Um,
Speaker 1: and so they've been tracking this and sort of publishing
Speaker 1: you know, stories on this for the last I think
Speaker 1: about eighteen months or so, just this idea that even
Speaker 1: though rents are are moving higher, people are able to
Speaker 1: afford those rights because their incomes are arising alongside those
Speaker 1: those rankings as well. So one other question on rent
Speaker 1: before we go off it, and again it sort of
Speaker 1: connects to uh broader housing questions. Uh. A lot of
Speaker 1: people I think, in the last couple of years when
Speaker 1: rates were low, bought houses as investment properties and maybe
Speaker 1: don't want to sell right now in part because there
Speaker 1: aren't a lot of buyers who are excited about the
Speaker 1: sticker shock of what a monthly mortgage now cost them.
Speaker 1: Could this bring more rental supply to market in your views, like, well,
Speaker 1: I can't sell it, so I rented, and could that
Speaker 1: have a dampening effect on rents? Yeah, very possibly. I mean,
Speaker 1: most indusseries don't trap single family rentals. The only one
Speaker 1: that I'm aware of that does is it's either zill
Speaker 1: or poor logic. It's one of those who has a
Speaker 1: single family right index where they do track what rents
Speaker 1: are specifically for that sort of you know for that
Speaker 1: type of rental um. And yeah, obviously if you can't
Speaker 1: sell it and you want it as best investment property,
Speaker 1: it makes quite a lot of sense given that, you know,
Speaker 1: demand is still pretty robust for for rentals. Vacancy rates
Speaker 1: have only barely started to edge higher from the lows
Speaker 1: that we saw, you know, even six months ago, so
Speaker 1: there's still quite a lot of demand out there, So
Speaker 1: it makes sense to do that at this stage. And yeah,
Speaker 1: hopefully that can help bring at least that one segment
Speaker 1: of of rent of the rental market down. And by
Speaker 1: the way, that is also captured in the CPI, right,
Speaker 1: the CPI isn't when we're talking about rents, it's not
Speaker 1: just apartments. They also to capture um single family rentals
Speaker 1: in that entire sample as well. So we've been talking
Speaker 1: a lot about rents um which have been pushing services
Speaker 1: up higher, but are at the point you've been making,
Speaker 1: are expected to start to decrease sometime soon, or at
Speaker 1: least the rate of acceleration will start slowing down. Talk
Speaker 1: to us about another big change that you see potentially
Speaker 1: on the horizon that has to do with healthcare. Yeah,
Speaker 1: so this is another one that I think is it's
Speaker 1: coming very soon. It's gonna it's gonna help everyone looking
Speaker 1: for that transitory in place story. Yes, you know kind yeah, so, um,
Speaker 1: you know, right, as I mentioned the biggest part of
Speaker 1: the course, the second biggest component is medical care UM.
Speaker 1: That's worth just about of the court. And for the
Speaker 1: last year, medical care has been rising in about, you know,
Speaker 1: roughly zero point five percent in each month, which means
Speaker 1: it's been adding about five basis points to the core
Speaker 1: change every single month. That's been very set. It's kind
Speaker 1: of like clockwork pretty much all all of last year. UM.
Speaker 1: Starting in termre that index is going to turn negative
Speaker 1: and it's gonna turn negative in most months over the
Speaker 1: course of the next year. And so what was a
Speaker 1: pretty constant um source of a boost to the core
Speaker 1: every single month is actually going to turn into a
Speaker 1: relatively decent drag on the core. And you know it's
Speaker 1: not because medical care is getting cheaper or so on. Uh,
Speaker 1: this is actually just one of these works in the
Speaker 1: methodology that you kind of have to be aware of, UM,
Speaker 1: and it comes very specifically from the health insurance index
Speaker 1: within the broader medical care gage. Well, what's the me
Speaker 1: So what is that change that's coming. Why is it's
Speaker 1: what is going to switch from pushing up to being
Speaker 1: a drag. Yeah. So so the story is basically that
Speaker 1: first of all, health insurance is updated once a year,
Speaker 1: typically in the October used to be September. Last year
Speaker 1: was October. This year will be in the October report
Speaker 1: again um. But this data lacks by almost about a
Speaker 1: year UM. So the BLS takes the state of and
Speaker 1: this is from an official source, the National Association of
Speaker 1: Insurance Commissioners, So this is sort of you know, they
Speaker 1: put out a big report on how much in premiums
Speaker 1: has been collected and how much is being paid out
Speaker 1: and how much is retained by insure. So this is
Speaker 1: kind of the holy grail of this data set. Unfortunately,
Speaker 1: it doesn't come out until that ten months apt into
Speaker 1: the year, and so what we're really capturing this October
Speaker 1: is going to be activity that happened in two thousand
Speaker 1: twenty one. And so what's can happen here is that
Speaker 1: if you think about and during the pandemic, people you know,
Speaker 1: put off things like elective surgeries. They didn't go to
Speaker 1: the doctor because people didn't want to be waiting, you know,
Speaker 1: in waiting rooms with other people who might have COVID, right,
Speaker 1: so there just wasn't a lot of utilization of healthcare services.
Speaker 1: To US twenty premium income continue to increase, but the
Speaker 1: benefits paid out actually declined. The way the CPI captures
Speaker 1: health insurance is by looking at the change in these
Speaker 1: retained earnings for insurance from one year to the next,
Speaker 1: and you know very quickly. The reason they do this
Speaker 1: is because it's really hard to price health insurance from
Speaker 1: one month to the next because policies are changing all
Speaker 1: the time. Right The what what a policy will cover
Speaker 1: will be could be changing quarterly, monthly, you know, each year,
Speaker 1: the risk factors that go into the policy can change.
Speaker 1: So when the billness is pricing any good or service,
Speaker 1: they want apples to apples from one of months to
Speaker 1: the next, and if something changes, they want a quality adjusted.
Speaker 1: But in healthcare and health insurance, they found that's just
Speaker 1: way way too hard to do. So the roundabout way
Speaker 1: of this indirect way of capturing the price to you,
Speaker 1: the consumer of health insurance is basically, what does it
Speaker 1: cost the business to offer you health insurance if they're
Speaker 1: also administering health services or health insurance is rising, you'll
Speaker 1: probably see that in your premiums, and so the way
Speaker 1: they captured this by looking at these retained earnings and
Speaker 1: how they're changing from one year to the next. So
Speaker 1: during the pandemic, premiums kept rising. However, benefits paid out
Speaker 1: to people went down quite substantially because of COVID and
Speaker 1: the lack of utilization of healthcare. So what you saw
Speaker 1: was a huge spike in retained earnings. And what that
Speaker 1: meant for the cp I was that in October of
Speaker 1: two thousand twenty one, which reflective is health insurance jumped
Speaker 1: by two in the month of two which means that basically,
Speaker 1: since you only updated once a year, it's effectively going
Speaker 1: to print right around two percent every single month like clockwork.
Speaker 1: Until the next Sunday fast forward, people started, you know,
Speaker 1: going back and taking care of these elective surgeries and
Speaker 1: utilizing healthcare much much more than they did premiums. It
Speaker 1: really changed to dramatically. So now you have a SIS
Speaker 1: match again where way more utilization of health care than
Speaker 1: you had, and so then those retained earnings dropped on
Speaker 1: a year a year basis. So what's going to happen
Speaker 1: now when you update it is that you're going to
Speaker 1: have a very large drag. So health insurance, which has
Speaker 1: been two months pretty much for the last year, is
Speaker 1: very likely to print in an October report around minus
Speaker 1: four percent. You know, on the surface, you say, well,
Speaker 1: plus two to minus four that doesn't really sound like
Speaker 1: a lot, but if you kind of put it into context,
Speaker 1: it actually is is kind of dramatic because number one
Speaker 1: in the month of October itself, that alone is worth
Speaker 1: almost a seven basis points swing on just a course tPON.
Speaker 1: So if you're forecasting let's say the core and you
Speaker 1: get a point forward in October, you're probably looking at
Speaker 1: something that's more like a point through instead, just because
Speaker 1: of this movement in health insurance. And you know, that's
Speaker 1: kind of the difference between a five percent in realize
Speaker 1: rate and you know something that's more like a three
Speaker 1: and a half percent in US. So that's a pretty
Speaker 1: big gap. The other issues here. On a year a
Speaker 1: year basis, health insurance currently is about twenty five percent
Speaker 1: year year because of the steady you know, two percent
Speaker 1: hours every month. When the next report comes out September,
Speaker 1: which is sort of the last herald before it, terms
Speaker 1: of negative will probably hit at once this minus four
Speaker 1: comes in in October and it stays here for the
Speaker 1: bulk of the year. By September three, Health Insurance I
Speaker 1: suspect we'll go from plus twenty eight to about minus four.
Speaker 1: Ye're here. That swing is worth almost about any basis
Speaker 1: points on the core CPI. So you have an index
Speaker 1: that's worth just over one percent of the entire course
Speaker 1: CPI that by itself will subtract almost a full percentage
Speaker 1: point from cornflation. An extreme that's is so crazy to
Speaker 1: be because the whole point of like measuring the stuff
Speaker 1: and then mondetary policies like countercyclical and this huge component
Speaker 1: as you just described, it has no there's no actual
Speaker 1: like economically cyclical impulse part of it. Well, this was
Speaker 1: actually going to be my next question, and oh, Mary,
Speaker 1: that was absolutely fascinating. And the thing about qualitative adjustments
Speaker 1: was something that I only like really discovered this year,
Speaker 1: so I didn't know the BLS, you know, if they're
Speaker 1: looking at the cost of a refrigerator, for instance, will
Speaker 1: take into account technological advances on the cost of the
Speaker 1: refrigerator if it now comes with I don't know, WiFi
Speaker 1: connectivity or something, yeah, blockchain enabled fridge um and they
Speaker 1: will factor that into the c p I. But I
Speaker 1: mean this gets to one of the major criticisms of
Speaker 1: the indices themselves. You can kind of see what they're
Speaker 1: trying to do, so it's difficult to measure qualitative improvements
Speaker 1: in things like healthcare insurance. But on the other hand,
Speaker 1: it does lead people to look at these things and go, well,
Speaker 1: what are we actually measuring here? And isn't it weird
Speaker 1: that the cost of living, you know, as measured by
Speaker 1: the CPI, which includes rent, healthcare, food, energy, whatever, can
Speaker 1: change just because of like the way this one thing
Speaker 1: is measured retained earnings versus the way we measure goods
Speaker 1: and things like that. What do you say to that
Speaker 1: criticisms It's fair to to make those sorts of criticisms.
Speaker 1: I guess I would say couple. One thing is that
Speaker 1: you know, this is never a static process in terms
Speaker 1: of the methodology, so the BLS is always trying to
Speaker 1: improve upon whatever is that they're doing. A good example
Speaker 1: of this something like new vehicles. Um just in April
Speaker 1: of this year, in fact, they introduced a brand new
Speaker 1: methodology for capturing the price of new vehicles. So before
Speaker 1: they used to go to dealers figure apples selling, you know,
Speaker 1: try to capture those prices. Now they're using a massive
Speaker 1: data set from Shady Power, which captures you know, essentially
Speaker 1: real live transactions that are occurring. So they've updated that
Speaker 1: quite in the forget me to really reflect kind of
Speaker 1: the conditions on the ground for people who are providing
Speaker 1: new cards. So there's always there's always this sort of, uh,
Speaker 1: you know, goal to improve upon the methodology. So that's
Speaker 1: that's number one. Number two is you know, you kind
Speaker 1: of do the best you can with what you're given.
Speaker 1: And by that I mean that a lot of these
Speaker 1: things are subject to things like budget constraints. Um, you know,
Speaker 1: when we talk about the rent for example, the BLS,
Speaker 1: if you survey a unit, let's say in January, and
Speaker 1: you say, hey, how much you're paying the rent? You
Speaker 1: come back to that unit, you don't come back to
Speaker 1: in February or March rate whill you come back to
Speaker 1: it in July six months later. Part of the rationalist
Speaker 1: because you know, rents don't change a lot in terms
Speaker 1: of the contracts, so six months seem like an adequate
Speaker 1: amount of time. But the two other reasons are one,
Speaker 1: respondent burden, Right, if I'm knocking on your door every
Speaker 1: single amount asking where the rent is, you might be
Speaker 1: less willing to participate in the survey. But the other
Speaker 1: is also there's a budget much terry constraint involved here
Speaker 1: in terms of you know, sending people out into the
Speaker 1: field to capture a lot of these data sets. Um,
Speaker 1: so that all of these things sort of constrain what
Speaker 1: uh you know, the BLS can ultimately produce in this
Speaker 1: particular instance for health insurance. You know, I can sort
Speaker 1: of understand a bit more of the criticism, but the
Speaker 1: issue here is really the data is just black ten months. Um,
Speaker 1: we can't do anything about that. I mean, the data
Speaker 1: that they are getting is from the National Association of
Speaker 1: Insurance Issues. And if you think about capturing all of
Speaker 1: the premium inverture, all of the claims that are paying
Speaker 1: by all of these health insurers, you know, it just
Speaker 1: takes up for for the last year. It just takes
Speaker 1: a while to put those numbers together. So this is
Speaker 1: just something with the BLS just has to wait on
Speaker 1: the data that they're capturing. Again, this that data set
Speaker 1: is you know, effectively like the bible for for health
Speaker 1: insurance data, right, and so this istance they can't do anything.
Speaker 1: They just have to wait until that's produced. UM. So
Speaker 1: I think you know, in some instances that I get
Speaker 1: the criticism. I just think you've got to understand that
Speaker 1: they were working within a number of different constraints, UM,
Speaker 1: and you know sort of take that into account when
Speaker 1: you're thinking about criticizing them for particular approaches, UM, in
Speaker 1: terms of, uh, you know, how they constructed it. Can
Speaker 1: we do a live event if you wondering where people
Speaker 1: throw out a CPI category and then you like on
Speaker 1: the fly explained No, I serious, people would love to
Speaker 1: explain how it's constructed because we could this. We could
Speaker 1: just talk forever on every category. I found this conversation. Seriously,
Speaker 1: Can we can we do that someday? Yeah, there's you know,
Speaker 1: there's uh two hundred forty three individual components and the CPI.
Speaker 1: I love it. I think I've got most of them
Speaker 1: down that we could probably do that. Other facts and oils,
Speaker 1: including peanut butter. Yeah, I can. I didn't say. I
Speaker 1: didn't say we could do the PPI. Okay, that's true. Wow,
Speaker 1: you actually knew that was a PPI code versus the CPI.
Speaker 1: That's verysive. We talked about one final thing. I just
Speaker 1: wanted to be showing the self insurance stuff is that
Speaker 1: you know. Part of the reason why I think it
Speaker 1: is pretty important is because this to set uh, the
Speaker 1: official report is coming out and thinking about a week.
Speaker 1: I tend to use separate source, which is you know
Speaker 1: carverage quite well. But basically, you know, my feeling is
Speaker 1: that folks who are either treating in place shan or
Speaker 1: who just generally following play shit are pretty unaware of this,
Speaker 1: this change that's coming. So this is gonna be something
Speaker 1: that you know, is at the margin going to help
Speaker 1: the FED month over month for the next year, along
Speaker 1: with I think the coming to kind of used cars.
Speaker 1: So really Q four potentially is shaping up to to
Speaker 1: see some lower core inflation. For instance, I'm going to
Speaker 1: spike the football at the end of Q far well
Speaker 1: Mer Sharif. Thank you so much for coming on. Fascinating conversation.
Speaker 1: Always love chanting with you. Always learned something and we'll
Speaker 1: have to have you back again to thank you. Take
Speaker 1: care of Thanks. That was great. I love talking to
Speaker 1: I always learned so much sitting as said, the fact
Speaker 1: that he gave me, you know, the like throws, these
Speaker 1: little like bits of red meat for team transitory. I
Speaker 1: just actually like learning about this, Like I had no
Speaker 1: idea how they captured health to church. That's so interesting
Speaker 1: to me. Yeah, So I think I have maybe three
Speaker 1: major takeaways from that. Like one, it's just crazy how
Speaker 1: much of the market and our daily lives are linked
Speaker 1: to the construction of this one index, and hat well't
Speaker 1: I mean it's multiple indexes, but p p I c
Speaker 1: p I and how it works, like think about all
Speaker 1: the payments, Treasury link securities, things like that that are
Speaker 1: linked to c p I, and so much of it
Speaker 1: depends on the individual construction. And then the second takeaway,
Speaker 1: you know what he was saying about the time lags
Speaker 1: and how COVID kind of messed those up. I think
Speaker 1: is a really good way of looking at why there's
Speaker 1: been so much confusion over inflation. And Then thirdly, this
Speaker 1: is something that I'd heard before, but the resource constraints
Speaker 1: on the BLS in terms of a set bling some
Speaker 1: of this data and trying to adjust it. I think
Speaker 1: that is maybe an underappreciated factor over the past couple
Speaker 1: of years. Well, and especially like some of these some
Speaker 1: of the stickier prices within goods that like, of course
Speaker 1: these should come down right, because we have every big
Speaker 1: box retailer saying we have tons of inventory. The housing
Speaker 1: markets slowed down, so it's like all kinds of reasons
Speaker 1: to think, yeah, we should be seeing some deflation and furniture,
Speaker 1: it's not happening. But then he says, oh, they you know,
Speaker 1: maybe they only contract a couple of hundred in the survey. Well, right,
Speaker 1: if your survey respondents are like the big box stores
Speaker 1: that have pricing power, still have pricing power for a while,
Speaker 1: then it'll be sticky. Now there's something, and we should
Speaker 1: at some point do an episode on when they changed
Speaker 1: the rules of inflation, because they look, it's crazy. I
Speaker 1: think that, like, you know, forty years ago, if they
Speaker 1: raised great that mathematically raised measured inflation because interest in
Speaker 1: mortgages was including the CPI, which is also like kind
Speaker 1: of maybe intuitive to a lot of people. Well, it's
Speaker 1: one of those things like you can see why they
Speaker 1: would do it, but on the other hand, it also
Speaker 1: seems odd if you think that CPI is supposed to
Speaker 1: measure the cost of living. Fascinating stuff. Yeah, we can
Speaker 1: talk about this for a long time. Okay, shall we
Speaker 1: leave it there. Let's leave it there. This has been
Speaker 1: another episode of the All Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway and
Speaker 1: I'm Joe wi Isn't All. You could follow me on
Speaker 1: Twitter at the Stalwart. Follow our guest Omer Sharif He's
Speaker 1: at f Cast of the Month. Follow our producer Carbin
Speaker 1: Rodriguez at Kerman Armine, and check out all of our
Speaker 1: podcasts Bloomberg under the handle at podcasts. Thanks for listening.