Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of The Odd Lots Podcast.
Speaker 2: I'm joll Wisenthal and.
Speaker 3: I'm Tracy Alloway.
Speaker 2: Tracy, you know, it's funny there's all this talk about, Okay,
Speaker 2: when when is inflation going to get back down to
Speaker 2: two percent? When is the Fed going to hit it
Speaker 2: to goals? But when we talk about inflation, there's a
Speaker 2: million ways to measurement or at least two or three
Speaker 2: big ones.
Speaker 3: Yeah, this is one of the things that I've really
Speaker 3: come to appreciate over time. There are so many different
Speaker 3: flavors of inflation, so many different ways of measuring it.
Speaker 3: My understanding is that there's basically, if you're going to
Speaker 3: break it down, there's CPI, there's PCE, there's core and
Speaker 3: supercore of each of them. And the way to do
Speaker 3: it is just choose whichever one of those confirms your
Speaker 3: priors and then focus on that.
Speaker 2: That's what I do.
Speaker 3: That's the secret.
Speaker 2: That's what I do. Whether it's PCE, whether it's CPI,
Speaker 2: look for the one that's closest to two percent, and
Speaker 2: if neither are that closed, then I then I lop
Speaker 2: out some things. It's like oh, if you exclude rent
Speaker 2: and use cars.
Speaker 3: And food everything you need to survive.
Speaker 2: That we're two percent, so it's time to cut rates.
Speaker 2: That's basically by my approaches. But I'm glad to hear
Speaker 2: that validate.
Speaker 3: I mean, that is the running joke, isn't it. If
Speaker 3: you exclude everything that you need to live, then inflation
Speaker 3: is coming down. But I think the important thing, the
Speaker 3: really important distinction, is CPI versus PCE. CPI is probably
Speaker 3: the one that people have in their heads when they
Speaker 3: think about inflation. But PCE, of course is the Fed's
Speaker 3: preferred measure and the thing that the Central Bank is
Speaker 3: actually focusing on.
Speaker 2: And I don't know why that is. Actually, yeah, like
Speaker 2: I know this that most of the time when people
Speaker 2: tell what's inflation rate right now, they'll look at CPI
Speaker 2: or maybe core CPI. But then where I was like,
Speaker 2: but you know, the FED looks at pc and I
Speaker 2: guess and I believe that to be true. But I
Speaker 2: actually don't know what it is about PCE that the
Speaker 2: FED prefers. I don't I know there's some different weights
Speaker 2: related to rent, and there's a few things there that
Speaker 2: cause them to change trajectory.
Speaker 3: Smooth some stuff is that right? It's supposed to be
Speaker 3: less volatile. But I one thing I do know, and
Speaker 3: I have to admit something here, and it's kind of
Speaker 3: embarrassing at this point in my career as a financial journalist,
Speaker 3: But CPI includes something called owner's equivalent rent, which is
Speaker 3: basically a measure of the cost of home ownership, and
Speaker 3: it comes up all the time as like a key
Speaker 3: difference between CPI and PCE, and I, for the world,
Speaker 3: do not understand what well. I kind of get what
Speaker 3: it's supposed to be, but I don't get how it's
Speaker 3: measured at all.
Speaker 2: Well, you know what I've been thinking, generally, I think
Speaker 2: it would be good to do more episodes about how
Speaker 2: do we actually get the data that we get, Like
Speaker 2: how do they do the jobs report survey? I actually
Speaker 2: don't really know much about that. How do they do
Speaker 2: all these different surveys. All the smartest people we talk
Speaker 2: to tend to know this stuff really well. Anyway, this
Speaker 2: episode that we're recording right now, when you're listening to it,
Speaker 2: it happens to be pc day, the day that the
Speaker 2: FEDS preferred inflation measure comes out, and so we should
Speaker 2: understand what's in the Fed's preferred inflation measure and how
Speaker 2: it differs from other measures of inflation.
Speaker 3: I am really into this topic. I feel like this
Speaker 3: is going to be an episode that I like bookmark
Speaker 3: the transcript of and then go back and look at
Speaker 3: it over and over again. So I'm looking forward to it.
Speaker 1: Well.
Speaker 2: I'm excited to say we do literally have the two
Speaker 2: perfect guests to talk about this, two people who really
Speaker 2: have a deep understanding and appreciation for how these numbers
Speaker 2: that appear on the screen. PCE for me, is just
Speaker 2: a number that appears at eight thirty am on my
Speaker 2: Bloomberg terminal. But the reality is there are all these
Speaker 2: surveys and calculations and then tabulations, and so there's a
Speaker 2: lot of hard work that goes into producing this number.
Speaker 2: We're gonna be talking to two people that have a
Speaker 2: deep understanding and appreciation for what goes in from a
Speaker 2: real bottoms up perspective, how these numbers appear on our screens.
Speaker 2: We're gonna be speaking to multiple time guests, both of
Speaker 2: them Omir Sharif he's the founder and president of Inflation Insights,
Speaker 2: as well as Skanda Emernath, executive director at Employee America,
Speaker 2: so Amair and Skanda, Thank you both for coming back
Speaker 2: on the show.
Speaker 4: Thanks for having us, Thanks omayor or.
Speaker 2: You know, what do we start with you like, why
Speaker 2: do you answer the sort of basic question for us
Speaker 2: of what is the difference between PCE and CPI. Why
Speaker 2: do they even why do we even have two separate
Speaker 2: measures of this?
Speaker 5: Yeah, I think the simplest way to think about it
Speaker 5: is just that they're intended to measure somewhat different things,
Speaker 5: so they're designed to sort of do different things. The
Speaker 5: pce is a much broader index. It captures especially more
Speaker 5: of the economy, if you will, than with the CPA does.
Speaker 5: The CPI focuses a bit more on consumers out of
Speaker 5: pocket expenditures, whereas the PCEE covers not just that, but
Speaker 5: also what is sort of paid on your behalf by
Speaker 5: third parties or the government. And a good way to
Speaker 5: think about this is healthcare. In the CPI, largely it's
Speaker 5: measured as you know, your out of pocket payment, let's say,
Speaker 5: for your copay if you go to visit the doctor,
Speaker 5: and there are some other additional measurements there as well.
Speaker 5: But in the PCE it includes things like you know, Medicaid,
Speaker 5: which is paid for by through taxes by the government
Speaker 5: that's out of the scope of the CPI. So scope
Speaker 5: is really kind of the thing that differentiates these two
Speaker 5: indexes because one has a certain scope really consumers out
Speaker 5: of pocket payments, which is a CPI, and the other
Speaker 5: has just a much broader scope, and it's really able
Speaker 5: to capture more of what's happening in the economy and
Speaker 5: more of the inflation you see through the broader economy.
Speaker 5: And that's probably I think why you hear the beneficial
Speaker 5: say that, you know, their preferences for the PCE versus
Speaker 5: the CPI.
Speaker 3: Can you talk a little bit more about that. So
Speaker 3: how did it come to be that the Fed is
Speaker 3: focused more on PCE going back in history? Was there
Speaker 3: like an announcement or a trigger for them to focus
Speaker 3: on that measure versus something like CPI.
Speaker 5: Yeah, I don't know that there's necessarily any historical basis
Speaker 5: for it. I think it's just more that the PCE
Speaker 5: is more representative of the broader economy. You know, it
Speaker 5: just captures more of what the types of inflation that
Speaker 5: people tend to see across the economy, but it also
Speaker 5: captures with some of the inflation that you know, businesses
Speaker 5: are seeing as well across the economy.
Speaker 4: So if you don't let me jumping out, there actually
Speaker 4: is a history to this. It's actually o great, why
Speaker 4: don't you take that on? Yeah, So the FED for
Speaker 4: the longest time actually did sort of focus more on CPI.
Speaker 4: They never have like a formal inflation target until twenty twelve,
Speaker 4: but if you ask the FED how they're tracking inflationary pressures,
Speaker 4: they probably point to CPI first until the year two
Speaker 4: thousand and so. Around that time time, especially green Span
Speaker 4: was focused on so the notion of quality change and
Speaker 4: how substitution bias might be at work, where the composition
Speaker 4: of what consumers consume changes. But CPI is conceptually more
Speaker 4: of a fixed basket relative to PCE, which is trying
Speaker 4: to dynamically change the weighting on the price index to
Speaker 4: match what people are consuming and put a little bit
Speaker 4: more emphasis on how consumer spending patterns change. And so
Speaker 4: around two thousand the shift was from CPI to PCE
Speaker 4: within the FED. If I didn't really say what kind
Speaker 4: of target was going to be, the place on it
Speaker 4: would think it was implicitly assumed to be around one
Speaker 4: to two one to two and a half percent, sort
Speaker 4: of where core inflation was, But actually there was a
Speaker 4: very big difference in terms of well you q CPI
Speaker 4: or PCE. There's obviously just an inherent bias and what
Speaker 4: CPI readings tend to be a little bit higher than PCE,
Speaker 4: and so that itself kind of changes sort of if
Speaker 4: you thought two percent with some magic number, it actually
Speaker 4: means different things if it's tracked in terms of CPI
Speaker 4: or PCE.
Speaker 2: What's happening, First of all, that's really interesting and I
Speaker 2: didn't know that that that history. What's happening right now?
Speaker 2: Just to get up to speed, we're going to dive
Speaker 2: into the guts of some of these, but right now
Speaker 2: there is a gap between pc and CPI or the course,
Speaker 2: what are we seeing in the trajectory of this sort
Speaker 2: of I guess you call it the wedge of the
Speaker 2: jaws between these two lines.
Speaker 4: So typically the wedge between core CPI and core PCE.
Speaker 4: To a first approximation, especially pre pandemic, you would have
Speaker 4: said it was roughly thirty to fifty basis points and
Speaker 4: the year of a year readings so point three to
Speaker 4: point five percent. If you know what core CPI is,
Speaker 4: you should be able to know what core.
Speaker 2: Pc is with CPI being right right now, with CPR
Speaker 2: being hired.
Speaker 4: Course CPI being higher, Okay, okay, And yeah, if you
Speaker 4: look right now, course CPI year over year is something
Speaker 4: like three point nine percent on a year of a
Speaker 4: year basis and core PCE is going to track something
Speaker 4: on two point nine percent, maybe two point eight some
Speaker 4: around there. Those readings are quite different, right. That's about
Speaker 4: one hundred basis point spread when the typical spread was
Speaker 4: point three to point five percent. And yeah, there's obviously
Speaker 4: a lot of variety of factors that have led to that.
Speaker 4: I'll kind of let Omeric kind of jump in to
Speaker 4: sort of like, how if you were trying to explain
Speaker 4: this on a the first major reason kind of that
Speaker 4: sticks out to him?
Speaker 5: Sure, yeah, So you know, I think everyone note normally
Speaker 5: focuses on the weights, right, and I think Joe you
Speaker 5: mentioned that earlier, and so they tend to focus on
Speaker 5: things like shelter inflation, right, I know we are, and
Speaker 5: the weight of that in the PCE is only about
Speaker 5: you know, fifteen sixteen percent, but of course in the
Speaker 5: CPI it's about forty three percent, and so people tend
Speaker 5: to focus on that difference and say, well, you know
Speaker 5: that tends to cause a big part of the wedge,
Speaker 5: and that's true in a very sort of static sense,
Speaker 5: and that what I mean by that is that over
Speaker 5: a short term horizon, let's say, you know, six months,
Speaker 5: seven months, eight months, those weights are just not going
Speaker 5: to change materially, right, difference is just going to be
Speaker 5: roughly about the same over a short term time period.
Speaker 5: And then the year year rates obviously for o were
Speaker 5: are don't move too dramatically either, So whatever that wedge
Speaker 5: is coming from shelter inflation in one month will be
Speaker 5: roughly the same you know, wedge in six months. What's
Speaker 5: been going on more recently really the last six months
Speaker 5: is that you know, Scotta talked about the spread historically
Speaker 5: being thirty to fifty. We'd gotten down to about forty
Speaker 5: five BIPs in July, so we were very close to
Speaker 5: kind of a historical norm between pc and CPI. In
Speaker 5: the last six months, it's blown back out to one percent.
Speaker 5: And that's largely because the PCEE has been slowing much
Speaker 5: much faster than the CPI, and that's typically something you know,
Speaker 5: people tenerally focus on the CPI as being the one
Speaker 5: that kind of causes the movements. But right now what
Speaker 5: we're seeing is actually it's the core PCE that is
Speaker 5: just slowing much much faster than the core CPI, and
Speaker 5: that's blown the spread back out from about forty five
Speaker 5: BIPs or so lie to about the one percentage point.
Speaker 5: And there's more new. Well, you know, this isn't really
Speaker 5: about shelter. This is about some stuff happening in medical care,
Speaker 5: and really much more than that. It is really about
Speaker 5: the core services part of the story. And those are
Speaker 5: very very different animals in the PCE versus the CPI.
Speaker 5: They're just not constructed the same in terms of the
Speaker 5: core services. And so that's really what we're seeing is
Speaker 5: core services is slowing really fast in the PCE, and
Speaker 5: in fact has kind of gone up a little bit
Speaker 5: in the CPI.
Speaker 4: And just for your listeners to kind of get a
Speaker 4: sense that CPI is source data, which is to say
Speaker 4: it actually is a measure of they're doing the direct measurement,
Speaker 4: the direct surveys of prices. Better to think about pc
Speaker 4: as a composite of different sources, including CPI, but not
Speaker 4: limited to just CPI. We also learn a lot about
Speaker 4: PCE from PPI input data, not the PPI aggregates themselves,
Speaker 4: but specific inputs, as americad have alluded to in healthcare,
Speaker 4: there there are inputs there from PPI that matter, from PCE,
Speaker 4: and then there are things that are that just outside
Speaker 4: of CPI and BPI that also matter. And it's that
Speaker 4: PPI and that other stuff that really feeds into core
Speaker 4: PC in a pretty meaningful sense and has driven more
Speaker 4: of this short run divergence even beyond what you might
Speaker 4: explain from kind of changes and weights rent owners equivalent rent.
Speaker 3: So I definitely want to dig into what's driving these
Speaker 3: various inflation numbers at the moment even more. But before
Speaker 3: we do, I have a sort of existential question, which
Speaker 3: is I'm always kind of amazed at how much mental
Speaker 3: energy we expend on the question of what prices are
Speaker 3: doing at the moment. And it seems like one of
Speaker 3: those things that like, all right, there's observable prices for everything,
Speaker 3: So like, why is it so difficult? And obviously the
Speaker 3: weightings come into play here and what you choose to
Speaker 3: focus on, et cetera, et cetera, But does it matter
Speaker 3: if PCE is different to CPI. I mean, if we
Speaker 3: understand the difference in methodology, why should we care about
Speaker 3: this divergence.
Speaker 4: I guess I think it matters to the extent that
Speaker 4: you are trying to anticipate let's say a CPI index,
Speaker 4: if you're someone who's let's say investing in inflation products
Speaker 4: inflation link financial products, or if you're somebody trying to
Speaker 4: focus on how the FED is supposed to react. When
Speaker 4: the FED is kind of laid out an inflation target
Speaker 4: that's anchored to two percent on PCE and proxied by
Speaker 4: core PCE over time, you'll get all of different answers.
Speaker 4: That's kind of the technical, sort of markets oriented answer.
Speaker 4: The bigger thing is actually, I think if you ask
Speaker 4: maybe some economists, they'll probably tell you, well, if you
Speaker 4: as like CPI, PCE, PPI, what all doesn't really matter.
Speaker 4: It should average out there is some underlying price level
Speaker 4: that is all just these are all just like imperfect
Speaker 4: approximations of the price level. But in practice you get
Speaker 4: some pretty big divergences, especially in real time, because of
Speaker 4: choices and weights, choices and methodology choices in what scope
Speaker 4: of goods and services you're going to put more emphasis
Speaker 4: on or less emphasis on, and you'll get different answers.
Speaker 4: And this is kind of how like that cottage industry
Speaker 4: of different private sector measures of inflation or true inflation
Speaker 4: or whatever it is shadow stats. These are all various
Speaker 4: spectrum of crankery to less crank measures of inflation. But
Speaker 4: I think that that's kind of the byproduct of the
Speaker 4: fact that all these choices do matter, right, And that's
Speaker 4: like there is some level of faith to saying there's
Speaker 4: some underlying true inflation and that's actually here, and it's
Speaker 4: not there. It just really depends on the choices you make.
Speaker 5: Just had two other things quickly. One is just simply
Speaker 5: that I didn't care about the CPI for two reasons,
Speaker 5: also a relative to the PCE. One is that you know,
Speaker 5: simply put, it comes out first and it shapes expectations
Speaker 5: for where inflation's going. So you know, we get that
Speaker 5: number typically by the twelve thirteenth of the month, whereas
Speaker 5: PCs the end of the month. So I think for
Speaker 5: a couple of weeks people are digesting, you know, what
Speaker 5: is the fad going to do based off of this
Speaker 5: inflation number, Even if we know their preference really is
Speaker 5: for the PCE, it just really starts to shape expectations
Speaker 5: very early on before we get the PCE, and I
Speaker 5: think the second thing is that it's tied to real
Speaker 5: life in the sense that you know, all the COLA
Speaker 5: adjustments made in social security, for example, are derived from
Speaker 5: the CPI. A lot of rent contracts are based on
Speaker 5: the CPI, So it does affect consumers in a variety
Speaker 5: of ways. And so I think that's why there's also still,
Speaker 5: you know, relative importance in terms of thinking about what
Speaker 5: the CPI is doing, in addition to what's gonna mentioned,
Speaker 5: which is that a lot of the PCE is built
Speaker 5: off of what the CPI is doing.
Speaker 2: Anyway, I want to get into and we're going to
Speaker 2: get into the sort of like deep methodological questions and
Speaker 2: where these numbers actually come from, et cetera. But before
Speaker 2: we get into sort of complicated methodological questions, I want
Speaker 2: to ask a sort of simple methodological question, which is like,
Speaker 2: how does the government, say in the CPI track the
Speaker 2: price of a tomato or something. I don't know, maybe
Speaker 2: I don't know if tomatoes a category, but something like that.
Speaker 2: Let's start with something simple, because I get why measuring
Speaker 2: insurance is super complicated. Measuring various things like that really difficult.
Speaker 2: But let's take something simple every month the government wants
Speaker 2: to know, like how much tomatoes and apples and pairs cost.
Speaker 2: What is the basic process of collecting that information.
Speaker 5: Well, so there's the consumer Expenditure Survey conducted now well
Speaker 5: now every year, used to be every two years. Basically,
Speaker 5: we're you know, asking people to track their spending and
Speaker 5: what they're spending on and how much they're spending on
Speaker 5: these items. And there's you know, thousands of these surveys
Speaker 5: conducted annually, and so from those surveys, we're collecting data
Speaker 5: on what exactly not just what you know, kind of
Speaker 5: apple or whether or not they're personing apples, but what
Speaker 5: specific kinds of apples they're purchasing. And so based on
Speaker 5: all of this collected information, you are then figuring out
Speaker 5: exactly what you want to price and what the share
Speaker 5: of spending is for each item in the basket. So
Speaker 5: you know, Fuji apples versus Granny Smith apples, whatever it
Speaker 5: may be. And these are done at you know, the
Speaker 5: metro level. So what's there The diary might be a
Speaker 5: little bit different, Let's say in Chicago versus you know,
Speaker 5: Miami versus New York in terms of some of these
Speaker 5: granular items. So ultimate least, a consumer expenditure survey that's
Speaker 5: sort of dictating everything from what it is that you
Speaker 5: want to collect prices for where you want to collect
Speaker 5: those prices as well, because you're also figuring out where
Speaker 5: it is that people are shopping, and then you know
Speaker 5: how much weight to put on an item within the basket,
Speaker 5: so apples within the you know, food at home grocery
Speaker 5: store index, use cars with the transportation index, and so on.
Speaker 5: So that really dictates everything in terms of the CPI
Speaker 5: and how it's it's sort of being constructed and what's
Speaker 5: being you know, picked to be priced.
Speaker 3: Maybe this is a good point to talk a little
Speaker 3: bit about a deterioration in some of the survey responses
Speaker 3: that people have been discussing recently. So the idea that
Speaker 3: a lot of this is based on the proportion of
Speaker 3: survey respondents who actually get back to you and say,
Speaker 3: this is how much we're spending on Fuji apples per
Speaker 3: month or whatever, and that percentage seems to be declining
Speaker 3: over time. I think I've written about this before, but
Speaker 3: I don't have the numbers in front of me, but
Speaker 3: it seems like that could be a pretty big deal
Speaker 3: for the accuracy of some of these figures, or maybe
Speaker 3: just have some sort of influence on them.
Speaker 4: Yeah, I mean, I think it seems to be an
Speaker 4: issue of because so many of these surveys are conducted
Speaker 4: over the phone. Not everything in CPI is that way.
Speaker 3: And no one answers their phone anymore. If someone calls me,
Speaker 3: I don't pick up.
Speaker 4: I mean, this is the same problem with election polling,
Speaker 4: right where we have a lot of non response going
Speaker 4: up and you don't know if that skews a certain way,
Speaker 4: and if you're kind of calling particular businesses. I don't
Speaker 4: think it's there's a more structured process there relative to
Speaker 4: say election polling, but there is still an issue I
Speaker 4: think of a non response that kind of permeates a
Speaker 4: lot of data. This is not just about inflation data now.
Speaker 4: It's obviously like labor market data has the same problem
Speaker 4: where response rates are going down, it's taking more calls
Speaker 4: to be able to kind of fill out the survey.
Speaker 4: The relative to other data points, I'm not sure inflation
Speaker 4: data is actually as vulnerable, but it is still this
Speaker 4: is a structural trend that, look, the data is only
Speaker 4: as good as you measure it, right, So this is
Speaker 4: actually going to be an ongoing challenge for the BLSS suspect.
Speaker 2: So let's talk about some of these idiosyncrasies, particularly within
Speaker 2: core PCE, because there are some things where you can
Speaker 2: just go to the grocery store. You can go to
Speaker 2: Whole Foods, and you can go to Trigger Joe's, and
Speaker 2: you can go to Associated and Wegmans and look at
Speaker 2: the price of Fuji apples or Red Delicious or God
Speaker 2: forbid Red Delicious. Hopefully those are getting a smaller and
Speaker 2: smaller weight in the basket because they're the worst apple.
Speaker 2: But then there are other things where you you cannot
Speaker 2: do that. There is not just a price tag, and
Speaker 2: things have to be imputed in some way, and so
Speaker 2: you have to sort of derive a price for things
Speaker 2: where there is just not a public price. Let's talk
Speaker 2: about some of these imputations and where they get weird,
Speaker 2: because I think this is where it gets like really interesting.
Speaker 2: Like you know, when it comes to like we pay
Speaker 2: people pay financial services, they pay for a financial advisor,
Speaker 2: et cetera. I don't know that there's like a simple
Speaker 2: price tag that that can be established. Talk about some
Speaker 2: of these more interesting or complicated or ethereal categories yeah.
Speaker 4: There are a set of transactions, especially now as you
Speaker 4: get into PCE where we have no real transactions are observing, right,
Speaker 4: there's probably the more common one would be sort of
Speaker 4: your owner's equivalent rent is very commonly cited because that
Speaker 4: is effectively trying to approximate effect to the cost of
Speaker 4: rent for someone who owns their house, and that is
Speaker 4: something that is not really a transaction there. But the
Speaker 4: BLS is and the BA BA obviously compiling or PCE,
Speaker 4: they are basically using rent data to do that, so
Speaker 4: they from the CPI Housing survey comes to rent data.
Speaker 4: That rent data is also then used for estimating owners
Speaker 4: equivalent rent. There's no transaction behind it, right, but it
Speaker 4: is basically saying we're going to assume this price represents
Speaker 4: what owner's equivalent revent looks like. It gets trickier when
Speaker 4: you get into some other things in PCE, the relative
Speaker 4: CPI something like imputed financial services, where there's no transaction
Speaker 4: taking place. It's specifically the value you the consumer derived
Speaker 4: from your financial institution and your bank. When you are
Speaker 4: getting all these various services, free checking, all sorts of
Speaker 4: other things, you're getting some value from whatever it is.
Speaker 4: Chase Bank in America. I'm just giving examples. You're getting
Speaker 4: some some services, and yet you're also not being charged necessarily, No,
Speaker 4: you're not getting sort of the deposit rate that reflects
Speaker 4: what like the bank itself.
Speaker 2: Earns spread between the bank deposit.
Speaker 4: And precisely precisely that that spread is a big part
Speaker 4: of how of the implicit price. And so the BA
Speaker 4: is simultaneously trying to measure what's that volume of value
Speaker 4: that the consumer's driving and also the way of like
Speaker 4: proxying what's the price associated with that value. And these
Speaker 4: are two things that are basically like dark arts, right
Speaker 4: Like it's kind of a not not like something that
Speaker 4: follows an obvious and verifiable method for being able to
Speaker 4: say this is how much value you're driving. There's just
Speaker 4: a lot of rough approximations. It's probably the funniest bit
Speaker 4: of core VC for my money, because it is a
Speaker 4: function of two factors. Which is the value you can
Speaker 4: think of as that spread between deposit rates and call
Speaker 4: it benchmark money market rates. And so if the FED
Speaker 4: is raising rates faster than deposit rates are moving, that's
Speaker 4: going to show up is more inflation. And if deposit
Speaker 4: and so and then we and we saw relatively high
Speaker 4: inflation from this category in twenty twenty two, and it
Speaker 4: really moved the needle on core PCEE even and then
Speaker 4: on the other side of it, when SBB hit, you
Speaker 4: obviously start to see banks start to raise their deposit
Speaker 4: rates more aggressively and the FED slow down on and
Speaker 4: so kind of weirdly, because of both of those factors,
Speaker 4: you've seen that part of VCE really ratchet down in
Speaker 4: the last six to nine months. And this is all
Speaker 4: very weird stuff where it's basically a function of well
Speaker 4: fed hikes are kind of inflationary through this category, and
Speaker 4: then slowing down on fed hikes and getting some deposit
Speaker 4: recatchup ends up being the opposite. It's kind of very
Speaker 4: bizarro stuff. There's some other things that matter, but it
Speaker 4: just kind of goes to show you like there's a
Speaker 4: lot of silly parts of this core pc I didn't
Speaker 4: say courts CPI, but it is. People tend to think
Speaker 4: this stuff is all very fundamental and mechanical, and I
Speaker 4: just would caution that there's a lot of weird methodology
Speaker 4: and imputations that kind of go into various parts of
Speaker 4: that complex.
Speaker 3: This is an interesting wrinkle to my campaign to improve
Speaker 3: the transmission of monetary policy by making everyone switch to
Speaker 3: higher interest bank accounts. But okay, I'm going to ask
Speaker 3: a slightly or a very provocative question, but just on
Speaker 3: the question of how we measure shelter, can both of
Speaker 3: you choose, like if you had to pick a preferred measure,
Speaker 3: would you be team CPI slash BLS or would you
Speaker 3: be team you know, PCE and BA Omeryl.
Speaker 2: I would probably say.
Speaker 5: This is tough, actually, now that I think.
Speaker 4: About it, On some level, the BA is using the
Speaker 4: BLS data, and so this is the data itself about
Speaker 4: rent and owner's equivalent rent are coming from the BLS
Speaker 4: and the CPI having survey in all of its perfections
Speaker 4: and imperfections. I think the better question asked is sort
Speaker 4: of like whether market rents are or contracted rents. What
Speaker 4: we're basically measuring in CPI, what the BLS is measuring
Speaker 4: is a is contracted rents. So they tend to lag.
Speaker 2: They tend to lag.
Speaker 4: They also tend to be a little bit smoother, a
Speaker 4: little bit more autocorrelated, a little bit more obviously cyclical
Speaker 4: in a way that let's say we had you been
Speaker 4: using market rents this entire time, we probably have much
Speaker 4: lower inflace and ratings now, or whether we probably see
Speaker 4: something close to two percent on the fence key gages,
Speaker 4: and yet we would have had very very high inflation
Speaker 4: observed in twenty twenty one. Maybe that's actually the true
Speaker 4: version of what was going on, but you also get
Speaker 4: more there's a bit of a trade off between getting
Speaker 4: smooth and cyclical versus something very volatile and jumpy and
Speaker 4: maybe not as reliable in terms of how to set
Speaker 4: monetary policy if you think that operates with some lag,
Speaker 4: which and so you would have either like a super
Speaker 4: super high inflation bulge in twenty twenty one or something
Speaker 4: a little bit more smoothed out over twenty twenty one
Speaker 4: to twenty twenty three. These debates kind of can cut
Speaker 4: up either way, and I'm not sure which is actually
Speaker 4: necessarily better, But it's better to just appreciate the fact
Speaker 4: that there's a lag.
Speaker 5: Yeah, I'm gonna come back and I'm going to say
Speaker 5: CPI and this is just Yeah. The simple reason for that,
Speaker 5: I think, in my mind at least, is the stuff
Speaker 5: that is quirky in the CPI. Like we've talked about
Speaker 5: health insurance on the show before the stuff that is
Speaker 5: quirky in the CPI, the PCE essentially just magnifies that
Speaker 5: even more by some of the items that are in
Speaker 5: that index, like the financial services furnished without payment index
Speaker 5: that you know Skanna talked about. I think there's even
Speaker 5: more stuff in that index that is sort of you know,
Speaker 5: conceptual and imputed. I mean, roughly thirteen percent of the
Speaker 5: entire core PCE is just these imputed prices that no
Speaker 5: one sees, which is why, by the way, we also
Speaker 5: have a market based core PCE to get rid of
Speaker 5: that and just look at actual prices that people do
Speaker 5: pay and people do see. So the CPI does, of
Speaker 5: course have some of that, but I think there's less
Speaker 5: of that influence in the CPI than in the pc
Speaker 5: And yes, we can talk about oere being heavier weight,
Speaker 5: but at the end of the day, it is that's
Speaker 5: in both indexes as well. So I would probably prefer
Speaker 5: the CPI over the pc.
Speaker 2: Let's talk about more of these interesting categories. So one
Speaker 2: of the things that we saw, especially in the sort
Speaker 2: of you know, the twenty twenty one twenty twenty two,
Speaker 2: the sort of big shift and consumption patterns between goods
Speaker 2: and services, And we talked a lot about Okay, goods
Speaker 2: are doing this and services are doing that, and goods
Speaker 2: prices through the roof, et cetera. But one of the
Speaker 2: things that you both pointed out over time, and I've
Speaker 2: heard you talk about this a fair amount, Skanda, is
Speaker 2: that this idea of drawing a bright line in many
Speaker 2: instances between a good and a service, it, particularly when
Speaker 2: it comes to measuring costs, is sort of impossible or
Speaker 2: fallacious in some way. And so auto insurance seems to
Speaker 2: be a big area in which we call it a
Speaker 2: service for measurement purposes, but it has connection to the
Speaker 2: goods aspect. Could you explain that a little bit further?
Speaker 4: Sure, I think the conventional wisdom and the FED is
Speaker 4: obviously done his job trying to propagate this, which is
Speaker 4: to say that, okay, the goods side of the economy
Speaker 4: that supply chains, that's like maybe a commodity short as
Speaker 4: you're there, services services sounds like labor, services, sounds like wages.
Speaker 4: Service prices are obviously a function of what people are
Speaker 4: who are working, how much are they paid, and then
Speaker 4: it's just some spread on that. So wage growth should
Speaker 4: be dictating services. They're like an okay guide for maybe
Speaker 4: understanding even housing costs.
Speaker 2: Like we think of like services as like some a
Speaker 2: restaurant worker or a massuse or someone painting your house
Speaker 2: or something like that, and so it's very much like correct,
Speaker 2: very linear to labor costs.
Speaker 4: Yes, And so you think of someone who's new cutting
Speaker 4: your hair, right, it's like that probably is more directly
Speaker 4: tied to one another. Right. But at the same time,
Speaker 4: I think like even like say housing, which I think
Speaker 4: of housing and rent as actually being related to labor market.
Speaker 4: But it's not the cost of like construction or maintenance
Speaker 4: that's really dictating the cost of rent. It's the marginal
Speaker 4: supply and demand for housing, and that's something that's not
Speaker 4: really driven by labor in any sort of proximate direct sense.
Speaker 4: But then we get to a lot of like vehicle insurance,
Speaker 4: when we get to airfares, those are areas where you
Speaker 4: can definitely point to specific things where goods and good
Speaker 4: supply chains really matter. So jet fuel costs are very
Speaker 4: important because they're the most variable cost in like an
Speaker 4: air airline's cost structure. Quite reliably, jet fuel costs feed
Speaker 4: into what airfares look like. So when jet fuel spiked
Speaker 4: in twenty twenty two due to the invasion of Ukraine.
Speaker 4: You saw lobsly crackspreads blue out, oil prices blow out,
Speaker 4: and therefore jet fuel prices blew out, and that had
Speaker 4: a pretty reliable and predictable pass through into airfares, and
Speaker 4: they even showed up in previous instances like the two
Speaker 4: thousand and eight oil price spike having a pass through
Speaker 4: effect into airfares. In the case of vehicle insurance, right,
Speaker 4: and it's not just vehicle insurance, we can think about
Speaker 4: motor vehicle leasing, repair, maintenance, rental. These are all i'd
Speaker 4: call value sensitive services. So the value of an automobile
Speaker 4: will shape the cost of being like that also affects
Speaker 4: the price of parts, right because let's say autobiles are
Speaker 4: in shortage, then the value of repair goes up because
Speaker 4: of it, the value of spare parts goes up. I
Speaker 4: mean've basically seen that, and that's obviously affected the cost
Speaker 4: structure for insurers. There are some other regulatory thing dynamics
Speaker 4: going on with respective vehicle insurance, and that also has
Speaker 4: an implication for CPI that's different from PCEE. But the
Speaker 4: connection between goods to services itself like kind of important
Speaker 4: to appreciate. Yes, services tends to move more slowly, with
Speaker 4: more of a lag, but it is kind of fundamentally
Speaker 4: moving with respect to a lot of these dislocated supply
Speaker 4: chain and commodity supply issues in ways that I think
Speaker 4: are in some ways it just removed from the labor
Speaker 4: market itself. I think that is something the FED has
Speaker 4: been kind of keen to say, Well, labor market must
Speaker 4: matter somewhere, so let me jam it into all these
Speaker 4: other services aside from housing. In practice, though, there's just
Speaker 4: a lot of stuff, even in supply chains and commodity
Speaker 4: price swings that actually have a lot of relevance beyond
Speaker 4: what we could strictly classify as a good and has
Speaker 4: a lot of impact on the services side of the economy,
Speaker 4: and services that are consumed but maybe actually pretty capital
Speaker 4: intensive or not necessarily tied to the direct price of labor.
Speaker 3: That reminds me, actually, can you talk a little bit
Speaker 3: about the timing of some of these pricing decisions? And
Speaker 3: what I mean by that is I remember talking to
Speaker 3: Omare about producer prices for mayonnaise. I guess this would
Speaker 3: have been over like two years ago, and there was
Speaker 3: an idea there that companies often revise their prices around
Speaker 3: quarter ends. There's also a more recent phenomenon that I
Speaker 3: think the Goldman Sachs analysts are calling the January effect.
Speaker 3: This idea that well, in a new year, lots of
Speaker 3: people revisit how much they're charging and unveil all their
Speaker 3: new prices around the new year. But talk to us
Speaker 3: about like the actual timing and mechanics of how prices
Speaker 3: get changed.
Speaker 5: So I will say that, you know, there is this
Speaker 5: you know, so called channery effect, which the rest of
Speaker 5: us just call residualciesonality in the data. That's been something
Speaker 5: that's been prevalent in you know, the start of your
Speaker 5: price increase is something that's been prevalent in the CPI
Speaker 5: data really for probably the last twenty years or so,
Speaker 5: and you tend to see it much much more in goods,
Speaker 5: where we're talking more about you know, furniture, apparel, things
Speaker 5: of that nature, where contracts for delivery tend to get
Speaker 5: reset for the start of the year. And so what
Speaker 5: you'll typically find is that, yes, at the very start
Speaker 5: of January and February, you tend to see prices on
Speaker 5: an unadjusted basis increase by more than what you'll see
Speaker 5: them do over the balance of the rest of the year.
Speaker 5: And that's something that's been pretty well known in the
Speaker 5: CPI data, and the idea is of seasonal adjustments should
Speaker 5: be able to sort of offset that seasonal move every year.
Speaker 5: But of course the problem is that, you know, those
Speaker 5: price increases aren't sort of a static thing. They tend
Speaker 5: to move around quite a lot, and so it's seasons
Speaker 5: never quite are able to capture it in that first go.
Speaker 5: It's only sort of several years later when the seasonals
Speaker 5: are kind of redone on those particular years where that
Speaker 5: effect kind of compresses in January. But we saw it,
Speaker 5: you know, this year for sure, where we had some
Speaker 5: big moves. What was really interesting though, so typically residual seasonality.
Speaker 5: The way it works is that first quarter the Q
Speaker 5: one data is typically stronger than the rest of the year.
Speaker 5: Two thirds of that strength is in core goods and
Speaker 5: only about a third of it is coming from the
Speaker 5: services categories, which makes a bit of sense when you
Speaker 5: think about you know, delivery cost changing for shipping goods
Speaker 5: items across the country and from overseas. That gets worked
Speaker 5: into new contracts at the start of the year for goods.
Speaker 5: What was really peculiar this year though, is that goods
Speaker 5: really didn't do much, you know, core goods, even excluding autos.
Speaker 5: All the strength was really in the services categories. And
Speaker 5: that's what really kind of stood out this January was
Speaker 5: it wasn't the traditional you know, it wasn't your your
Speaker 5: father's residual seasonality. This was something a little bit different
Speaker 5: because it was so heavily focused on the services side.
Speaker 5: And so that's something I think we just need to
Speaker 5: be careful of going forward. Is normally, when you think
Speaker 5: about residual seasonality, you say, okay, you know, so January
Speaker 5: Febry effect, once we get into the second quarter, it'll
Speaker 5: go way. And if it was in core goods again
Speaker 5: this January, I would have said, yes, that's probably the
Speaker 5: right take, but I would just say there's maybe a
Speaker 5: little bit more caution here needed because it wasn't in
Speaker 5: core goods, it was in core services. So I think
Speaker 5: that's just something we need to be a little bit
Speaker 5: careful of, you know, thinking about the data going forward.
Speaker 4: And something that may be an extension of Omer's point here. Right,
Speaker 4: So in Omere's time about course services and CPI, this
Speaker 4: is exactly where thinking about the wedge is especially important
Speaker 4: because when you think about the particular prices that are
Speaker 4: of relevance for PCE, once you get outside of goods
Speaker 4: and housing and goods and called rent and owners equivalent
Speaker 4: front specifically, there's a pretty big divergence between what you
Speaker 4: learn from CPI, especially in that kind of supercre core
Speaker 4: non housing services CPI is very different from core non
Speaker 4: housing services pc and they're just like where you talked
Speaker 4: about any impeded financial services as being one goofy example,
Speaker 4: but there are other examples, including vehicle insurance and airfares,
Speaker 4: where they're just measured in different ways, and so the
Speaker 4: residual seasonality that shows up in one part of service
Speaker 4: a core service CPI segment doesn't necessarily have a neat cognate,
Speaker 4: but how are they.
Speaker 2: Measured differently those categories in the two indices, which categories
Speaker 2: well you said, I think you said, airferers and motor
Speaker 2: vehicle insurance are measured differently.
Speaker 4: So more vehicle insurance, for example, is more directly to
Speaker 4: insurance products in general. And CPI is really about a
Speaker 4: function of payment and what's really the out of pocket
Speaker 4: costs to the consumer conceptually, so it's really tracking that
Speaker 4: in real time. And obviously right now you have a
Speaker 4: lot of state by state insurance companies are pushing for
Speaker 4: regulators to allow them to charge higher premiums for auto
Speaker 4: insurance after a sort of a psychal of I think,
Speaker 4: a lack of profitability relative to the cost and expenses
Speaker 4: of for insure, whereas for vehicle and for insurance products
Speaker 4: and PCE, it's really about the value that is trying
Speaker 4: to proxy or capture, right, So the value to the
Speaker 4: consumer is a function of not just what you pay,
Speaker 4: but also what third parties are paying and what you're
Speaker 4: getting back in terms of the expenses that have to
Speaker 4: be covered. So they do tell you different things there.
Speaker 4: Vehicle insurance in PCE has been much more benign. It
Speaker 4: comes from a PPI segment, whereas vehicle insurance in CPI
Speaker 4: has been very strong, and so that's like one part
Speaker 4: of the divergence. Then there's another one. Airfares is actually
Speaker 4: a function of I think American really speak to this
Speaker 4: with high expertise here, but the CPI is tracking very
Speaker 4: specific routes and trying to track them systematically over time
Speaker 4: in terms of how much cost to be able to
Speaker 4: fly from one place another different categories of seats on airplanes,
Speaker 4: but in PPI it's meant to reflect sort of the
Speaker 4: revenue for passenger mile and it tends to have a
Speaker 4: little more of an upward bias actually electric to CPI.
Speaker 4: So PPI and PPI for airfares has gaily run stronger
Speaker 4: than CPI and especially so so despite the wedge blowing out,
Speaker 4: it hasn't been a function of airfares as much as
Speaker 4: other categories.
Speaker 6: But I'll let when expand.
Speaker 5: Further here, well, I'm just going to actually quickly put
Speaker 5: some numbers on the auto insurance thing, because yes, the
Speaker 5: methodologies are different, but to give you some sense of it,
Speaker 5: auto insurance and the CPI right now year of year
Speaker 5: is running at about twenty one percent in the pc
Speaker 5: is running at about eight point seven. So you know,
Speaker 5: methodologies are different. They produce vastly different numbers and growth
Speaker 5: rates for these two indexes. So given their weightings, you're
Speaker 5: going to have just, you know, a very different influence
Speaker 5: of what is a Sensibly, it seems like on the
Speaker 5: surface the same thing auto insurance, but the different measurement
Speaker 5: is resulting in just vastly different growth rates, which means
Speaker 5: its impact on the core and core services overall is
Speaker 5: also just going to be hugely different. So that hopefully,
Speaker 5: you know, kind of gives some context around what the
Speaker 5: difference in methodology can mean for the growth rates around
Speaker 5: these these particular items. On airfares, Yeah, you know, it's
Speaker 5: gonna mention it's the CPI is basically very much just
Speaker 5: a weighted average of routes you know, Chicago, La, La,
Speaker 5: to Vegas, what have you, and is very much just
Speaker 5: capturing directly from the carrier's website what it is that
Speaker 5: you're paying for that flight and also the cost of
Speaker 5: the first checkback, and the ppi's you know, is also
Speaker 5: looking at these routes, but looking at the overall revenue
Speaker 5: for passenger mile ascutamension, so month to month they can
Speaker 5: actually differ quite a bit. Over the longer term, the
Speaker 5: trends directionally, they tend to be in the same direction,
Speaker 5: but it can cause you know, variability on a month
Speaker 5: to month basis, where you could have the CPI, for example,
Speaker 5: up three four percent and the PPI actually down a
Speaker 5: couple of percentage points. So on a month to month basis,
Speaker 5: you do have to be sort of be aware of
Speaker 5: what these differences are because they can produce you know,
Speaker 5: pretty different results and pretty different impacts on the relative course.
Speaker 4: Yeah, airfares is a really big one from the CPI,
Speaker 4: just because it's so volatile in the CPI and you'll
Speaker 4: typically hear right afterwards, well, core services X housing CPI
Speaker 4: was really strong or really soft, and it's driven by
Speaker 4: airfares and that just doesn't have the sort of bearing
Speaker 4: on that sort of supercre pcee component because that's coming
Speaker 4: from BPI and you learned that usually only a day
Speaker 4: OFCU latter.
Speaker 5: I can't tell you over the years the amount of
Speaker 5: time and money I've spent trying to get airfares right.
Speaker 5: And it's worth like less than one percent of the
Speaker 5: core CPI because you know, again the volatility, it could
Speaker 5: be up eight percent, down eight percent, and so it
Speaker 5: can add or subtract you know, five to ten basis
Speaker 5: points each month from the core and so getting that,
Speaker 5: you know, it's just one of these high volatility ones
Speaker 5: where yes, it's not worth a lot, but the magnitude
Speaker 5: of the moves is so great that it just demands
Speaker 5: a lot of attention, you know, like hotel rates as well,
Speaker 5: same thing.
Speaker 3: Gosh, darn airlines and their dynamic pricing. So we mentioned
Speaker 3: earlier that we're recording this episode right before PCE comes out.
Speaker 3: Can I put you both on the spot and ask
Speaker 3: you for PCE guesses.
Speaker 5: I am probably I think a little bit below some
Speaker 5: of those, so most most of I guess the forecasters
Speaker 5: I would want to follow, or right around point four zero.
Speaker 5: I'm a touch lower at point three six. I think
Speaker 5: the difference is just assumptions about imputed prices that people
Speaker 5: are making. But on the super Core PCEE, I'm expecting
Speaker 5: a point five so that is going to be, you know,
Speaker 5: pretty strong print. I think obviously in the core CPI
Speaker 5: we had about a point eighty five. But yeah, I
Speaker 5: think it's going to be a relatively firm print. The
Speaker 5: PPI data was strong, the CPI data was strong, so
Speaker 5: at least for January, it looks like we're going to
Speaker 5: get a pretty robust move in the PC data.
Speaker 6: Yeah.
Speaker 4: This is actually coincidental because I'm not sharing my work
Speaker 4: at OMERE on these things. But we end up in
Speaker 4: the same place on both core PC being point three
Speaker 4: six percent and super core for myself point five zero percent.
Speaker 4: But I also will not like for at least on
Speaker 4: the year reading. Something to be pre is there's also revisions,
Speaker 4: So while some people might have higher month over month readings,
Speaker 4: they may not also reflect the fact that there are
Speaker 4: reasons for revisions to prior months. So for example, and
Speaker 4: it's something I think also om er Vi here to
Speaker 4: talk about too, which is financial services prices now not
Speaker 4: the imputed ones, but the ones that we that are
Speaker 4: more measureable. Those prices also kind of factor into revisions,
Speaker 4: and those are why I suspect that we're probably going
Speaker 4: to see more shallow inflation progress. So if we kind
Speaker 4: of were around high two point nine percent, low three
Speaker 4: percent last month, that's actually going to bump.
Speaker 2: Up a bit. And yeah, real quickly.
Speaker 4: The same time we're going to see two point eight
Speaker 4: eight percent for COREBC.
Speaker 2: Real quickly. I'm glad you said this is going to
Speaker 2: be my last question. Explain measured financial services. So when
Speaker 2: stocks go up, measures of inflation go up. Correct.
Speaker 4: So first approximation, measured measured financial services are a lot
Speaker 4: of the portfolio management services that consumers are effectively consuming,
Speaker 4: and those the way they're measured, tend to in the
Speaker 4: aggregate kind of proxy what the equity market's doing how much,
Speaker 4: So can vary a little bit over time, but the
Speaker 4: equity market doesn' matter. So the equity market's been up
Speaker 4: a bunch over the last few months, and that has
Speaker 4: taken time to really show open the PPI data, but
Speaker 4: it has, and that PPI data kind of is relevant
Speaker 4: for sort of PC purposes.
Speaker 5: Yeah, and in the PC, that Portfolio Management index is
Speaker 5: you know, it added quite a bit to the generary
Speaker 5: core PCE number. I think it's going to add something
Speaker 5: like eight basis points to that number alone, and that
Speaker 5: is mostly a reflection of how the equity market did
Speaker 5: in Q four, so up around I think SMP was
Speaker 5: something like twelve thirteen percent higher. That pretty much goes
Speaker 5: into you know, the returns that are reported to the BLS.
Speaker 5: So these equity returns from you know, mutual funds and
Speaker 5: ETFs and private portfolio managers. They come back and say, hey,
Speaker 5: we did great in Q four. Here are numbers that
Speaker 5: gets built into the PPI data, which then flows into
Speaker 5: the PCE. And so you know, the index is worth
Speaker 5: one and a half percent. But when you're up five
Speaker 5: percent or so roughly as it was last month, you're
Speaker 5: gonna get a big pop in the core PCE. So
Speaker 5: that's that's likely what you know we already saw into
Speaker 5: PPI and that's what's going to feed into the pce
Speaker 5: SO equities. You matter quite a bit for that number.
Speaker 2: All right, Well, this episode comes out at four a m.
Speaker 2: Eastern on the twenty nine, so people have four and
Speaker 2: a half hours to listen to it and then you know,
Speaker 2: understand what's gonna come out at eight thirty a m. Eastern.
Speaker 2: Omeer and Sconda, thank you so much for coming on.
Speaker 2: That was fascinating. We want to do more of these
Speaker 2: episodes where we actually learn about the data that we
Speaker 2: talk about all the time. But appreciate you both for
Speaker 2: coming back on the oblawnch thank you.
Speaker 6: Thanks for having us.
Speaker 2: Tracy, I phound that to be a really interesting conversation.
Speaker 2: I have to say, you know, the cranks will hate
Speaker 2: me for this. I have a lot of admiration for
Speaker 2: the public officials, the bureaucrats, the economists is at the
Speaker 2: BLS and BEE who have BA who have to like
Speaker 2: assemble all this stuff and figure out, like you know,
Speaker 2: the different ways of measuring airline costs and portfolio management costs.
Speaker 2: It doesn't seem easy.
Speaker 3: I think that's a totally fair thing.
Speaker 2: To say.
Speaker 3: The other thing I would say is like the people
Speaker 3: doing this, at least at the BLS are really responsive
Speaker 3: to inquiries and omayor would be able to talk about
Speaker 3: this and maybe we should have asked him. But if
Speaker 3: you send them a question and ask I did this
Speaker 3: for that mayonnaise story and ask them like, how are
Speaker 3: you calculating this particular line item, they won't get back
Speaker 3: to you and they'll get on the phone with you
Speaker 3: and explain it for like twenty minutes.
Speaker 2: This is true and actually listeners should.
Speaker 3: Know this that if you don't flood the BLS with
Speaker 3: the don'ts.
Speaker 2: But when you see someone and you see something, they're like, oh,
Speaker 2: this is people like this is crazy, look what they
Speaker 2: hid in this area. They're very transparent and this is true.
Speaker 2: They'll call You can call them up and they'll say
Speaker 2: this is what this is how it works. So Tracey
Speaker 2: is making an excellent point. No one's going to take
Speaker 2: us up on that because people prefer to believe conspiracy theories.
Speaker 2: But if you see something that see they will respond.
Speaker 3: If you see something, say something, you.
Speaker 2: See something, if you see a weird number, call them
Speaker 2: up and explain. They will explain how it came there.
Speaker 3: Well, the other thing that comes out of that conversation,
Speaker 3: and again I thought both Scanda and Omer were incredibly
Speaker 3: clear in laying out the difference in methodology. But really
Speaker 3: the overarching theme is the amount of like subjectivity and
Speaker 3: value decisions being made when it comes to how to
Speaker 3: present this overall data. And you can get super granular
Speaker 3: on this and think about all these things that are
Speaker 3: sort of hidden in the background. But I remember there's
Speaker 3: stuff like, you know, the waiting of certain items is
Speaker 3: different depending on where you are in the country. There's
Speaker 3: also qualitative adjustments. So you know, your refrigerator, maybe the
Speaker 3: price is declining, but now how it comes with Wi Fi,
Speaker 3: and so you have to incorporate that qualitative judgment as well.
Speaker 5: Well.
Speaker 2: You know in some of these things that know Mayor
Speaker 2: made this point about, I think in one of the
Speaker 2: insurance categories about how CPI and PC are different. So
Speaker 2: you could imagine, you know, let's say someone pays I
Speaker 2: don't know, one hundred dollars a month for car insurance
Speaker 2: and then the next month, you know, the next year
Speaker 2: it goes up to one hundred and ten, so that's
Speaker 2: a ten percent increase. But you know, let's say that
Speaker 2: in that second year, you know, you're getting one hundred
Speaker 2: and seven dollars back every month equivalently, and repairs for
Speaker 2: your car in the previous year, you're early getting ninety. Well,
Speaker 2: maybe arguably your insurance just got cheaper because the amount
Speaker 2: you're getting back relative to the amount you're paying is
Speaker 2: so much higher. And so you could see immediately how
Speaker 2: something that's very important, insurance, huge parts of the economy,
Speaker 2: becomes incredibly difficult to measure when you're trying to gauge, like, well,
Speaker 2: are you just trying to gauge how much you pay,
Speaker 2: or are you trying to gauge how much you paid
Speaker 2: relative to the value of the service received, which is
Speaker 2: going to be you know, a change based on the
Speaker 2: value of your car and the difficulty of obtaining the
Speaker 2: replacement components. It's really tricky stuff.
Speaker 3: Well, I also like Scanda's point on this note about
Speaker 3: deposit betas, and yeah, I know, I feel like we
Speaker 3: should end this before we start talking about how gas
Speaker 3: prices going down is actually inflationary. I think people spend more.
Speaker 2: I think you're gonna say we should end this before
Speaker 2: I suggest that we should be paying our banks for
Speaker 2: checking well that too, but you know it really clicked
Speaker 2: because you know, we had that episode with Steve Stephen
Speaker 2: Kelly and I was like, well, what is the service
Speaker 2: of a bank? And He's like, the service of a
Speaker 2: bank is deposits. And that's why you get a sub.
Speaker 2: You get that cheap rate because they're providing your service.
Speaker 2: So there is this sort of intellectual logic behind Okay,
Speaker 2: you're getting two percent rates for your checking account, FED
Speaker 2: funds in five percent, therefore implicitly that you're paying you know,
Speaker 2: you're paying three percent for those checking services and all
Speaker 2: those other things. But yeah, these are tricky things to measure,
Speaker 2: but it is funny how mechanically, just like the FED
Speaker 2: raising rates and increasing, uh, that gap between rates and
Speaker 2: deposit rates just sort of mechanically increases measured inflation.
Speaker 3: Joe, you're about one connection away from breaking out the
Speaker 3: yield bug hat again.
Speaker 2: So I'm like, I'm like that, what's that what's that
Speaker 2: meme of the guy? Oh yeah, I think it's it's
Speaker 2: always sunny. Yeah, Philadelphia, That's where I'm right now.
Speaker 3: Okay, shall we leave it there.
Speaker 2: Let's leave it there.
Speaker 3: This has been another episode of the Authoughts podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway and I'm.
Speaker 2: Joe Wisen though you could follow me at the Stalwart.
Speaker 2: Follow our guests OMAYR. Sharif he's at f Cast of
Speaker 2: the Month and Sconda Amernath at Irving Swisher. Follow our
Speaker 2: producers Carmen Rodriguez at Carmen Ermann, dash, Ol Bennett at
Speaker 2: Dashbot and kel Brooks at kel Brooks. Thank you to
Speaker 2: our producer Moses on them From our odd Loads content.
Speaker 2: Go to Bloomberg dot com slash odd Lots for transcripts,
Speaker 2: blog and a newsletter, and you can chat with fellow
Speaker 2: listeners twenty four to seven in the discord discord dot
Speaker 2: gg slash offline.
Speaker 3: And if you enjoy ad thloughts, if you like it
Speaker 3: when we discuss the methodology behind some of the big
Speaker 3: numbers that we talk about on a daily basis, then
Speaker 3: please leave us a positive review on your favorite podcast platform.
Speaker 3: And remember, if you are a Bloomberg subscriber, you can
Speaker 3: listen to all of our episodes absolutely ad free. All
Speaker 3: you need to do is connect to your Bloomberg account
Speaker 3: with Apple Podcasts. Thanks for listening.