WEBVTT - Omair Sharif Explains How Inflation Measures Really Work 0:00:10.800 --> 0:00:14.920 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:15.000 --> 0:00:19.480 I'm Joe Wisenthal and I'm Tracy Halloway. Tracy, do you 0:00:19.520 --> 0:00:22.960 remember I think it was probably like last June or 0:00:23.079 --> 0:00:26.160 last July, like over a year ago. Now, I think 0:00:26.160 --> 0:00:30.720 we're talking to Vitour Constantio, and I think you asked 0:00:30.760 --> 0:00:33.680 like one of the most important questions, like at the 0:00:33.720 --> 0:00:36.960 time and maybe still like that we've had on this podcast. 0:00:37.040 --> 0:00:39.600 I struggle to remember things that happened a month ago, 0:00:39.840 --> 0:00:42.080 um let alone twelve months ago. Everything is sort of 0:00:42.120 --> 0:00:47.440 blurring into this one long stretch. But um, yeah, that's fair. 0:00:47.720 --> 0:00:53.000 What did I ask, Well, you asked him whether economists 0:00:53.120 --> 0:00:57.120 or anyone these days had a cogent theory of inflation. 0:00:58.000 --> 0:01:00.200 Do you remember that? And at the time, like you know, 0:01:00.240 --> 0:01:02.360 there wasn't much inflation going on. I think we're probably 0:01:02.360 --> 0:01:06.000 still in something resembling deflation or disinflation not long after 0:01:06.000 --> 0:01:09.760 the initial shock. But now, you know, fast forward to 0:01:10.000 --> 0:01:15.840 August and official inflation measurements are pretty elevated relative to 0:01:15.880 --> 0:01:19.480 recent history. And I think that question and I think 0:01:19.520 --> 0:01:21.440 it's basic into us. No, although I don't want to 0:01:21.520 --> 0:01:24.760 quote him on that, that question of like whether economists 0:01:24.800 --> 0:01:28.440 understand inflation has probably never been is extremely top of 0:01:28.480 --> 0:01:31.000 mind these days totally, And I mean, I think I 0:01:31.040 --> 0:01:34.080 would agree with you on the no part. But of 0:01:34.080 --> 0:01:36.319 course there's a really big irony right now, which is 0:01:37.040 --> 0:01:41.160 right when the FED changed to the flexible average inflation 0:01:41.200 --> 0:01:44.440 targeting regime, after you know, more than a decade of 0:01:45.000 --> 0:01:47.880 undershooting the two percent inflation target. As soon as they 0:01:47.920 --> 0:01:53.320 did that, now we seem to have possibly um transitory inflation, 0:01:53.600 --> 0:01:57.040 but like certainly more than they would have expected a 0:01:57.080 --> 0:02:01.080 year ago. And and yeah, like it just illustrates that 0:02:01.120 --> 0:02:03.760 no one seems to have a very good handle on 0:02:04.040 --> 0:02:09.840 what exactly causes price increases or decreases. Right, So, even 0:02:09.919 --> 0:02:14.040 prior to the new framework, there's always been this idea that, okay, 0:02:14.080 --> 0:02:16.320 we'll use and this came up in our recent episode 0:02:16.320 --> 0:02:19.919 of Neil Cary of the Minneapolis Fed, that okay, we'll 0:02:20.040 --> 0:02:23.320 use inflation as our gauge, as our speed limit to 0:02:23.360 --> 0:02:26.360 know when we say hit maximum employment or full employment. 0:02:26.639 --> 0:02:28.520 That's true under the old FED, that's true under the 0:02:28.520 --> 0:02:32.480 current Fed. Now we have elevated inflation, but it's like, oh, 0:02:32.560 --> 0:02:35.440 this doesn't really count because it's transitory and it's related 0:02:35.480 --> 0:02:37.000 to shipping, and we know that doesn't have anything to 0:02:37.040 --> 0:02:39.480 do with employment, but there's always probably gonna be a 0:02:39.560 --> 0:02:42.640 story to tell which sort of calls to mind whether 0:02:42.720 --> 0:02:45.400 these are sort of like useful things. Of course, no 0:02:45.440 --> 0:02:49.600 one predicted this sort of like very few people accurately 0:02:49.600 --> 0:02:51.880 predicted the timing and the degree of elevation of the 0:02:51.919 --> 0:02:55.520 current inflation. So I think we're still sort of like 0:02:55.639 --> 0:02:58.080 back to square one. We don't know how long this 0:02:58.120 --> 0:03:00.720 will last. I don't even think there's a agreement of 0:03:00.800 --> 0:03:04.040 like what really would be transitory, of what would be worrisome, 0:03:04.120 --> 0:03:06.240 of what would spur the FED to act sooner than 0:03:06.280 --> 0:03:09.919 maybe markets effect, And so I think, um, that question 0:03:10.120 --> 0:03:14.480 that you asked Constancio several months ago remains really the 0:03:14.520 --> 0:03:18.520 sort of the key thing right now. Yeah, alright, So 0:03:18.560 --> 0:03:21.880 today we're going to be talking about inflation and really 0:03:21.919 --> 0:03:24.840 what it is and how it's measured, and whether it's 0:03:24.840 --> 0:03:28.520 even possible to forecast it accurately or how we should 0:03:28.560 --> 0:03:31.720 be thinking about it right now, And we have literally 0:03:31.760 --> 0:03:35.720 the perfect guest. We're gonna be speaking with Omar Sharif. 0:03:35.760 --> 0:03:38.320 He's currently uh the founder and president of a new 0:03:38.360 --> 0:03:41.000 shop that he's set up called appropriately enough for this 0:03:41.040 --> 0:03:45.160 episode Inflation Insights, but he has a long track record. 0:03:45.240 --> 0:03:48.440 He's prior to that a by side strategist at the 0:03:48.480 --> 0:03:51.840 asset management for Millennium. He's been an economist at various 0:03:51.880 --> 0:03:56.000 shops including a Soak, Gen, RBS, and so forth. So 0:03:56.280 --> 0:03:58.800 we're going to talk about whether there is a a 0:03:58.880 --> 0:04:01.280 cogent theory of ation and how to think about it 0:04:01.360 --> 0:04:03.760 right now. So Amara, thank you so much for joining us. 0:04:04.280 --> 0:04:07.640 Thank you having me. Well, what's your answer to Tracy's question? 0:04:08.200 --> 0:04:12.800 Do do economists have a useful or cogent theory of 0:04:12.840 --> 0:04:17.960 inflation that that works in practice? I think the short 0:04:18.000 --> 0:04:20.159 answer to that is, now, you know, all you have 0:04:20.200 --> 0:04:22.440 to do is sort of look at the fact that 0:04:22.480 --> 0:04:26.520 there's a massive academic literature that's basically just devoted to 0:04:26.839 --> 0:04:30.280 forecasting inflation and you know, coming up with variou types 0:04:30.279 --> 0:04:33.800 of models to figure out what the inflation process is. 0:04:34.320 --> 0:04:37.560 And there's an equally large literature talking about why we're 0:04:37.600 --> 0:04:40.960 so bad and forecasting inflation. So I don't know that 0:04:41.000 --> 0:04:44.599 there's a coaching theory. It seems to sort of change 0:04:45.000 --> 0:04:48.160 based on where we are kind of in the cycle, 0:04:48.839 --> 0:04:51.039 and there's different ways of approaching you know, how you 0:04:51.040 --> 0:04:53.320 want to forecast inflation. They're sort of the top down 0:04:53.400 --> 0:04:57.360 modeling approach that a lot of academics use. And I 0:04:57.400 --> 0:04:59.880 think sort of what's more kind of in favor and 0:05:00.000 --> 0:05:01.920 out something that I started doing, you know, well over 0:05:01.960 --> 0:05:03.440 ten years ago, which was kind of more of the 0:05:03.480 --> 0:05:08.120 bottom up approach UM to forecasting inflation. But ultimately, I 0:05:08.120 --> 0:05:11.400 don't know that there's a coaching theory that really can 0:05:11.520 --> 0:05:14.039 explain the inflation process over you know, let's say the 0:05:14.080 --> 0:05:17.400 last several decades. UM. You sort of try to understand 0:05:17.440 --> 0:05:19.800 it based on where you are, I think in the cycle. 0:05:21.040 --> 0:05:25.440 So what is it that makes inflation UM so difficult 0:05:25.480 --> 0:05:28.560 to grasp? Is it the idea of UM that you 0:05:28.600 --> 0:05:30.800 just pointed out that it basically depends on where you 0:05:30.839 --> 0:05:33.960 are in the cycle, and so your framework or the 0:05:34.040 --> 0:05:39.400 dynamics that are underpinning prices are are kind of changing constantly. Yeah, 0:05:39.440 --> 0:05:41.600 I think that's that's exactly what it is. It's just 0:05:42.160 --> 0:05:45.840 it's a constantly evolving process UM. And you know, one 0:05:45.839 --> 0:05:47.440 way to think about it is that if we're trying 0:05:47.480 --> 0:05:49.280 to forecast it, and let's say we just want to 0:05:49.279 --> 0:05:51.000 think about where it's going to go over the course 0:05:51.040 --> 0:05:55.000 of the next year. You know, there are all sorts 0:05:55.000 --> 0:05:57.479 of approaches you can take in terms of modeling, but 0:05:57.640 --> 0:06:00.479 some of the simplest approaches actually worked the which is 0:06:00.480 --> 0:06:02.599 simply to say that, you know, if I want to 0:06:02.600 --> 0:06:04.880 forecast inflation over the course of the next four quarters, 0:06:05.720 --> 0:06:08.200 I might just use the average of the last four quarters, 0:06:08.600 --> 0:06:11.120 and most often than not, that will actually perform better 0:06:11.720 --> 0:06:14.000 than trying to come up with some models that you know, 0:06:14.360 --> 0:06:18.360 Phillips curve type models for example, because inflation persistence is 0:06:18.600 --> 0:06:21.960 actually a pretty big key I think in trying to 0:06:22.040 --> 0:06:25.600 understand the dynamics with an inflation um and that persistence 0:06:25.720 --> 0:06:29.000 is is it varies across time and and that is 0:06:29.040 --> 0:06:31.320 one of the keys really and trying to think about 0:06:31.360 --> 0:06:33.240 it is you know, if I if I were to 0:06:33.279 --> 0:06:35.840 tell you that the core CPI has been between one 0:06:35.880 --> 0:06:37.240 and a half to two and a half percent for 0:06:37.279 --> 0:06:41.160 the last twenty years, those types of models that are 0:06:41.360 --> 0:06:44.159 what we call nightive models work quite well because if 0:06:44.200 --> 0:06:47.080 inflation has been around that for the last twenty years, 0:06:47.120 --> 0:06:48.880 pretty good odds that you know for the next year 0:06:48.920 --> 0:06:52.560 will be somewhere in that range. Uh. But that persistence 0:06:52.640 --> 0:06:55.200 varies in the short run. It varies, you know, even 0:06:55.240 --> 0:06:58.040 within a decade, and so trying to capture that kind 0:06:58.040 --> 0:07:01.520 of time varying nature of inflation for sistance is really 0:07:01.520 --> 0:07:05.279 what everyone's striving to do. And that's why certain models perform, 0:07:05.480 --> 0:07:08.599 you know, really well in certain decades and they completely 0:07:08.640 --> 0:07:12.440 collapse in the next decade. Well, so this gets to 0:07:12.520 --> 0:07:15.640 something that we um talked about in the beginning that 0:07:15.680 --> 0:07:18.240 whether we're talking about the FEDS new framework, and we 0:07:18.240 --> 0:07:22.040 should point out recording this auguste by the time people 0:07:22.040 --> 0:07:23.600 listen to this, it will have been the one year 0:07:23.640 --> 0:07:26.760 anniversary of Jackson Hole where they laid out and so 0:07:26.960 --> 0:07:28.640 we make it some new speeches on this, but where 0:07:28.640 --> 0:07:32.040 they laid out the new framework last year. So whether 0:07:32.080 --> 0:07:35.840 it's the new framework, the Flexible Average Inflation Targeting Framework, 0:07:35.880 --> 0:07:38.120 or the old framework, I'm not even sure what that was, 0:07:38.360 --> 0:07:41.080 both are premised on this sort of like Phillips curve, 0:07:41.160 --> 0:07:44.800 thinking that there is some inherent trade off, that there 0:07:44.880 --> 0:07:48.400 is some inherent speed limit or maximum employment, and we'll 0:07:48.400 --> 0:07:51.240 know we'll get there not by some number of employment level, 0:07:51.320 --> 0:07:55.400 but by inflation readings. And if the nature of inflation 0:07:55.440 --> 0:07:58.720 sort of changes all the time, maybe decade by decade 0:07:58.800 --> 0:08:01.640 or some other time interval. Is that going to be 0:08:01.680 --> 0:08:04.680 a folly for the FED to think that inflation or like, 0:08:04.800 --> 0:08:08.000 is there any reason to think that Philip's curve thinking 0:08:08.080 --> 0:08:12.080 or Philips curve framework will be a useful guide post 0:08:12.600 --> 0:08:14.840 for the FED? It's hard to say. I think that 0:08:14.960 --> 0:08:17.040 the thing is that the Feds, you know, their time 0:08:17.040 --> 0:08:20.000 horizons really if you think about it is essentially about 0:08:20.040 --> 0:08:22.200 three years, right. We we get about three years of 0:08:22.200 --> 0:08:25.320 forecast from the FRET FED within the SCP, and so 0:08:25.560 --> 0:08:28.000 you know, if you're thinking about inflation changing over ten 0:08:28.080 --> 0:08:30.200 years or fifteen years, that's less of an issue for 0:08:30.240 --> 0:08:32.920 the FED. So that can the Phillips curve work accurately 0:08:32.960 --> 0:08:35.800 for them? And then a three to five year horizon sure, 0:08:36.040 --> 0:08:37.400 And and so you know there are times that it 0:08:37.440 --> 0:08:40.960 has actually performed relatively well. So for example, kind of 0:08:40.800 --> 0:08:44.240 the late seventies when you ran aggressions sort of these 0:08:44.480 --> 0:08:47.200 you know, using output on employment gaps, Phillips curves actually 0:08:47.240 --> 0:08:49.960 turned out to to be kind of useful. But you know, 0:08:50.040 --> 0:08:52.520 the FED will always tell you that they have a 0:08:52.559 --> 0:08:54.760 suite of models that they look at. They will look 0:08:54.800 --> 0:08:58.720 at everything from core inflation to you know, trim means 0:08:58.760 --> 0:09:01.280 and medium c P I S. So I don't know 0:09:01.360 --> 0:09:05.000 that they're as reliant on the Phillips curve as they 0:09:05.120 --> 0:09:06.800 used to be, and I think they've kind of spelled 0:09:06.800 --> 0:09:09.440 that out for us over the course of you know, 0:09:09.480 --> 0:09:12.120 the last year. It's not clear that the Philip's curve 0:09:12.160 --> 0:09:14.600 really works, and I think Powell's kind of ditched that approach, 0:09:15.000 --> 0:09:16.240 and it's you know, it's kind of back to the 0:09:16.280 --> 0:09:18.760 old adage of saying, you know, we'll we'll know it 0:09:18.800 --> 0:09:20.720 when we see it, and we'll kind of wait for 0:09:20.760 --> 0:09:23.040 the whites of the eyes of inflation before we decide 0:09:23.080 --> 0:09:26.920 to move on on policy. MHM. So you mentioned all 0:09:26.960 --> 0:09:32.520 the different inflation stats or figures that the FED can 0:09:32.600 --> 0:09:35.200 look at, and of course there are, I mean, there's 0:09:35.240 --> 0:09:38.920 probably dozens of different measures of inflation um that are 0:09:38.960 --> 0:09:43.559 based on hundreds, if not thousands, of different baskets. I 0:09:43.600 --> 0:09:47.959 guess my question is how much does your interpretation or 0:09:48.040 --> 0:09:52.679 does one's interpretation or thinking around inflation actually depend on 0:09:53.000 --> 0:09:55.760 the measure that they're looking at, And how do people 0:09:55.800 --> 0:10:00.120 go about choosing which measure is most relevant m in 0:10:00.120 --> 0:10:05.400 a particular time. Well, I think, you know, we there's 0:10:05.400 --> 0:10:07.720 basically two main measures. Is the way that I really 0:10:07.920 --> 0:10:09.640 look at it. You know, there's obviously the c p 0:10:09.800 --> 0:10:11.840 I and then there's the there's the Feens preferred measure 0:10:11.920 --> 0:10:14.559 that the core PC. Are there other measures that you 0:10:14.600 --> 0:10:17.040 can look at, absolutely, but typically they tend to be 0:10:17.120 --> 0:10:20.040 kind of variations on those two. So you know, the 0:10:20.600 --> 0:10:23.880 trim mean and and the median c p I and 0:10:24.080 --> 0:10:27.640 the median PC are just variations and different ways to 0:10:27.720 --> 0:10:30.920 kind of approach those same baskets. And you know, maybe 0:10:30.920 --> 0:10:33.280 you're taking some of the volatility out from the top 0:10:33.280 --> 0:10:36.440 and the bottom, but you're really sticking with those two 0:10:36.480 --> 0:10:39.800 main baskets, which one you want to really focus on? 0:10:40.160 --> 0:10:42.320 You know, I think it depends. Um, if you're the Fed, 0:10:42.360 --> 0:10:44.880 they've already made that decision for us. You know, it 0:10:44.920 --> 0:10:47.199 kind of makes it easy. Um, we're gonna be focusing 0:10:47.200 --> 0:10:49.520 on the core PC if you're thinking about monetary policy. 0:10:49.840 --> 0:10:52.360 But obviously for the markets, what matters is the c 0:10:52.480 --> 0:10:54.880 p I and what matters is the CPI because that's 0:10:54.920 --> 0:10:58.199 what it goes into pricing tips. So it sort of 0:10:58.240 --> 0:11:00.040 depends on who you are. You know, if you're the A, 0:11:00.160 --> 0:11:02.360 obviously you're going to be concerned and obviously the two 0:11:02.360 --> 0:11:05.600 are related about you know, roughly something like seventies seventy 0:11:06.120 --> 0:11:09.559 of the core PC is actually just passed through from 0:11:09.640 --> 0:11:12.560 the course cp I. So those to me are really 0:11:12.600 --> 0:11:15.080 the at least in the US, are the two main 0:11:15.200 --> 0:11:18.280 metrics that you want to focus on. Well, let me 0:11:18.320 --> 0:11:22.400 ask you. You know, if economists, you know, don't have 0:11:22.440 --> 0:11:24.960 a great track record of forecasting inflation, they don't have 0:11:24.960 --> 0:11:28.400 great models um for it. So we have these things 0:11:28.480 --> 0:11:30.520 that Okay, if I talked to Tracy, I say, let's 0:11:30.559 --> 0:11:32.959 talk about inflation, and we want to know where inflation is. 0:11:33.000 --> 0:11:36.120 We'll look up some indicries on the terminal, might look 0:11:36.160 --> 0:11:39.280 up to c p I, course, CPI, core PC, etcetera. 0:11:39.800 --> 0:11:44.760 Are the concepts of inflation indices themselves cogent? In other words, 0:11:45.240 --> 0:11:48.400 we're put we're aggregating all these different prices and trying 0:11:48.440 --> 0:11:50.720 to arrive at one number. And right now I think 0:11:50.720 --> 0:11:53.000 the number, you know, cp I, it's a little bit 0:11:53.000 --> 0:11:56.120 over five percent, maybe five point four percent, I don't 0:11:56.160 --> 0:11:58.880 remember exactly. That's down from a recent high. But is 0:11:58.920 --> 0:12:04.320 there some true information contained in that headline number or 0:12:04.440 --> 0:12:07.400 is it just a number that gets spit out when 0:12:07.679 --> 0:12:09.960 you go through the work of adding up all of 0:12:10.000 --> 0:12:13.480 the thousands of prices that go into it. Yeah. Look, 0:12:13.480 --> 0:12:15.560 I mean at the end of the day, Um, all 0:12:15.559 --> 0:12:18.760 of this stuff is is a construct, right, and and 0:12:18.840 --> 0:12:21.480 there's certain things in there which I think do a 0:12:21.559 --> 0:12:25.920 great job of reflecting reality. And if we think about energy, 0:12:26.080 --> 0:12:28.320 that's a very simple one. You know, everybody knows what 0:12:28.360 --> 0:12:32.160 they're paying at the pumper for gasoline, and within the 0:12:32.200 --> 0:12:35.280 c p I, you know you're you're capturing these movements 0:12:35.320 --> 0:12:38.200 and energy prices, those are pretty straightforward. The same thing 0:12:38.320 --> 0:12:40.760 is true when you think about you know, car prices. 0:12:41.320 --> 0:12:43.559 These are items that are pretty easy, easy to capture, 0:12:44.000 --> 0:12:46.080 and you know they do a pretty good job sort 0:12:46.080 --> 0:12:49.760 of representing reality. Where you start to get we start 0:12:49.800 --> 0:12:52.079 to lose people, frankly, is when you kind of get 0:12:52.120 --> 0:12:56.200 into some of the sort of the price index theory 0:12:56.320 --> 0:12:59.360 and sort of the number theory where you start to 0:12:59.400 --> 0:13:02.400 talk about imputations and you know how to handle missing 0:13:02.440 --> 0:13:05.600 prices and you know, owner's equivalent RAN is a great example. 0:13:06.360 --> 0:13:08.480 There's been a debate about this for you know, pretty 0:13:08.559 --> 0:13:10.679 much the last forty fifty years about how should we 0:13:10.679 --> 0:13:14.720 really capture house prices? What is the role in an index? 0:13:15.200 --> 0:13:17.160 And the CPI is very clear, we don't want to 0:13:17.240 --> 0:13:19.520 We don't want anything to do with house prices. Why, 0:13:19.600 --> 0:13:22.440 because we consider it to be an asset. We're trying 0:13:22.480 --> 0:13:25.000 to measure what you pay out of pocket as a consumer, 0:13:26.080 --> 0:13:28.800 And so these are the kinds of debates that I think, 0:13:28.840 --> 0:13:31.480 you know, when you're paying, when you're seeing you know, 0:13:31.760 --> 0:13:35.760 home prices go up, you care less about what satistations 0:13:35.760 --> 0:13:38.239 are arguing about when it comes to you know, imputation 0:13:38.280 --> 0:13:39.920 and so on. You just know that if you want 0:13:39.920 --> 0:13:42.240 to buy a house, you've got to pay more than 0:13:42.280 --> 0:13:44.520 maybe you did last year. And so you tend to 0:13:44.559 --> 0:13:47.120 kind of lose the public when you're getting into those 0:13:47.120 --> 0:13:49.480 sorts of weeds in the inflation data. But I think 0:13:49.480 --> 0:13:52.319 for the most part, these indexes do a pretty good 0:13:52.400 --> 0:13:55.000 job of capturing what's going on in terms of the 0:13:55.000 --> 0:14:14.360 pricing environment around US. UM. Can we spend a little 0:14:14.360 --> 0:14:18.240 bit of time on owners equivalent rent or o E ER, 0:14:18.360 --> 0:14:20.920 because as you mentioned, this is a source of big controversy. 0:14:21.360 --> 0:14:24.520 Anyone looking at the housing market, you know, over the 0:14:24.560 --> 0:14:27.760 past few decades will say that house prices have gone up, 0:14:28.160 --> 0:14:32.600 rents have gone up, um, certainly relative to one's income. 0:14:33.280 --> 0:14:37.400 So why is it that it seems difficult for the 0:14:37.440 --> 0:14:41.160 inflation indices to capture that, is it just is it 0:14:41.240 --> 0:14:45.600 just that they've made a conscious decision not to include 0:14:45.600 --> 0:14:47.840 it or to include it in this very specific way, 0:14:47.960 --> 0:14:51.560 or is it something else? So we actually used to 0:14:51.560 --> 0:14:55.520 include it, um so so prior to the CPI, for example, 0:14:56.080 --> 0:14:58.320 um they took what was called the asset approach, and 0:14:58.360 --> 0:15:01.280 so that included, uh, you know, the price of a house, 0:15:01.600 --> 0:15:06.400 included everything related to your mortgage, interest costs, your property taxes, 0:15:06.440 --> 0:15:09.080 and so on. And even though from about the late 0:15:09.080 --> 0:15:13.040 fifties to about three they they did it in this manner, 0:15:13.560 --> 0:15:15.880 they knew from really the early sixties that this was 0:15:15.960 --> 0:15:18.560 not the right approach and this was just a conceptual 0:15:18.680 --> 0:15:20.840 issue with the cp I. All this had to do 0:15:20.960 --> 0:15:24.240 was was to say, what we're really doing here is 0:15:24.520 --> 0:15:27.880 we're capturing an investment piece of the house, and we're 0:15:27.880 --> 0:15:30.680 also we really want to capture is just the consumption 0:15:30.720 --> 0:15:32.840 aspect of it. And so they knew for you know, 0:15:32.960 --> 0:15:36.480 twenty plus years um that even though they were doing 0:15:36.520 --> 0:15:38.480 in this manner, this was not what they wanted to 0:15:38.520 --> 0:15:42.120 actually be doing in terms of the CPI. And finally 0:15:42.160 --> 0:15:45.120 around the late seventies they started doing more detailed work 0:15:45.120 --> 0:15:47.800 on how to get around, you know, eliminating the investment 0:15:47.840 --> 0:15:51.040 piece of it and focusing just on sort of the 0:15:51.080 --> 0:15:53.680 shelter part of it UM. And they made that change 0:15:53.680 --> 0:15:57.560 in three and you know, another part of the reason 0:15:57.600 --> 0:15:59.560 for making that change was, you know, as you recall, 0:15:59.640 --> 0:16:01.720 interest rates were kind of all over the map in 0:16:01.800 --> 0:16:05.920 the late seventies and the early eighties, and that introduced 0:16:05.920 --> 0:16:08.760 a tremendous amount of volatility in the CPI to the 0:16:08.800 --> 0:16:12.200 point where it sort of became, I don't want to 0:16:12.200 --> 0:16:15.120 say useless, but so volatile that it was really hard 0:16:15.160 --> 0:16:16.760 to get any kind of sense of what was going 0:16:16.800 --> 0:16:20.720 on with underlying inflation. And you had everything tied to it, 0:16:20.760 --> 0:16:24.800 you know, cost of living adjustments UM, wage negotiations were 0:16:24.800 --> 0:16:26.400 tied to it. And one year it was up you know, 0:16:26.440 --> 0:16:28.800 ten eleven, the next year might be back down to three. 0:16:29.560 --> 0:16:31.960 So it was sort of losing its significance, and so 0:16:32.120 --> 0:16:35.360 this decision was made to work on trying to implement 0:16:35.720 --> 0:16:40.120 this owner's equivalent rent index, which finally came into playe UM. 0:16:40.240 --> 0:16:44.040 So that is a consensual issue. It's it's just underlies 0:16:44.080 --> 0:16:46.240 sort of what the CPI is really meant to do. 0:16:47.280 --> 0:16:50.360 The second part of this, I think, is that you know, 0:16:50.400 --> 0:16:53.280 when you look at for example, Zello core logic and 0:16:53.280 --> 0:16:57.160 you're seeing rents up, where you're seeing case Shiller saying 0:16:57.200 --> 0:17:01.000 house prices are one of the you don't see it 0:17:01.040 --> 0:17:04.560 in the CPI indexes. To that magnitude is because it 0:17:04.680 --> 0:17:07.920 is there's just very little turnover in the CPI sample. 0:17:08.800 --> 0:17:12.720 So every month, only about ten to fift pent the 0:17:12.760 --> 0:17:17.640 sample actually represents new renters, and so what you see 0:17:17.640 --> 0:17:20.560 in list prices um you know that might be moving 0:17:20.640 --> 0:17:23.920 very quickly when market conditions are changing, that shows up 0:17:23.960 --> 0:17:26.960 over the course of about twelve to eighteen months in 0:17:26.960 --> 0:17:30.360 the CPI because you just don't have that same kind 0:17:30.359 --> 0:17:33.360 of turnover that you see in these indexes that look 0:17:33.359 --> 0:17:35.879 at just for example, listed rents. So part of its 0:17:35.920 --> 0:17:39.040 conceptual issue, but the other part is just the methodology 0:17:39.080 --> 0:17:41.840 and the way that the sample works. You're just never 0:17:41.880 --> 0:17:44.320 going to have the magnitude of the changes that you 0:17:44.359 --> 0:17:47.240 see in all these sort of you know, private private 0:17:47.320 --> 0:17:50.040 sector indexes. So like if we're talking about something like 0:17:50.080 --> 0:17:54.879 buying apples or buying milk or buying gasoline, everybody buys 0:17:54.960 --> 0:17:57.520 those things every day or every week all the time 0:17:58.000 --> 0:18:02.760 with rant, not only do very few people actually signed 0:18:02.760 --> 0:18:06.280 a new lease every every month, but also many of 0:18:06.320 --> 0:18:08.680 the new leases that people actually sign or with their 0:18:08.680 --> 0:18:12.240 current landlord, and so they probably uh don't get the 0:18:12.240 --> 0:18:15.280 full market rent because those are those don't adjust as fast. 0:18:15.760 --> 0:18:18.520 And so you know, looking at this, Okay, this is 0:18:18.560 --> 0:18:20.119 one of the big questions right now. We know that 0:18:20.200 --> 0:18:23.080 headline inflation has come down a little bit. Used cars 0:18:23.080 --> 0:18:25.240 seem to have stopped going up. That's a big factor. 0:18:25.520 --> 0:18:28.240 But everyone's like, okay, ore is coming, ohr is coming. 0:18:28.520 --> 0:18:31.159 We see the market rent some places like Zillo and 0:18:31.200 --> 0:18:33.920 so forth, those are shooting up. Why don't you give 0:18:34.000 --> 0:18:36.439 us what you know? Sort of you just explained the theory. 0:18:36.720 --> 0:18:38.720 What are you actually seeing in practice when you look 0:18:38.720 --> 0:18:42.000 at the data and how much is rent and other 0:18:42.359 --> 0:18:44.960 attempts that the CPI or that these in disease used 0:18:45.000 --> 0:18:48.160 to capture shelter. How much upward pressure are they going 0:18:48.200 --> 0:18:51.800 to put on the measures in the months and years ahead. Yeah, 0:18:51.800 --> 0:18:54.439 so we you know, we have seen both of these measures, 0:18:54.480 --> 0:18:56.280 both rent and now we are actually bottom out over 0:18:56.280 --> 0:18:58.760 the course of the last several months, and you're starting 0:18:58.760 --> 0:19:02.680 to see price increases. Is in the major metro areas, 0:19:02.880 --> 0:19:06.640 and so even you know, places like New York, Los Angeles, Chicago, 0:19:06.680 --> 0:19:09.600 San Francisco, which are still down pretty sharply year over year, 0:19:09.920 --> 0:19:12.199 it looks like on a monthly basis they've they've finally 0:19:12.240 --> 0:19:14.919 kind of begun to stabilize a little bit. And you know, 0:19:14.960 --> 0:19:16.840 it's important to kind of understand when you talk about 0:19:16.840 --> 0:19:19.919 the c p I that a lot of these rent indicries, 0:19:20.160 --> 0:19:22.639 what really matters is where these you know, so called 0:19:22.800 --> 0:19:25.320 Class A cities, which are you know, the big ones 0:19:25.320 --> 0:19:27.960 with populations over two and a half million, what they're 0:19:28.000 --> 0:19:32.280 doing because the weights on these cities um is incredibly large. 0:19:32.560 --> 0:19:34.320 So if you looked at just three of them, New York, 0:19:35.000 --> 0:19:40.240 Los Angeles, Chicago, that is of the entire rent inducts 0:19:40.240 --> 0:19:43.679 from just those three metro areas. So where they go 0:19:43.880 --> 0:19:46.280 matters quite a lot for the overall index. But we 0:19:46.320 --> 0:19:49.199 are starting to see these places stabilize and move up. 0:19:49.240 --> 0:19:51.120 But I think there's something to keep in mind here 0:19:51.160 --> 0:19:53.879 about you know, this whole story about shelters commenting and 0:19:53.880 --> 0:19:55.360 O we are is going to go up and so on. 0:19:56.080 --> 0:19:59.520 Number One, people again are looking at these private market 0:19:59.560 --> 0:20:02.760 rent data and they're seeing seven percent eight percent growth. 0:20:03.400 --> 0:20:05.480 We've never seen anything like that in the c p I. 0:20:05.480 --> 0:20:08.119 I'm hard pressed to think, you know, we'll see anything 0:20:08.160 --> 0:20:09.919 like that over Let's say that the course of the 0:20:09.960 --> 0:20:13.679 next year, um will rent go up, yes, but you know, 0:20:13.760 --> 0:20:16.480 don't forget before the pandemic we were running around three 0:20:16.480 --> 0:20:19.320 and a half percent. We're about two and a half 0:20:19.320 --> 0:20:22.320 percent right now, and rent and we are combined. So 0:20:22.480 --> 0:20:24.320 you know, even if you move up a full percentage 0:20:24.320 --> 0:20:26.000 point over the course of the next year, you'll be 0:20:26.080 --> 0:20:28.760 kind of right back where you started in early two 0:20:28.760 --> 0:20:31.400 thousand and twenty. But let's assume for a moment that 0:20:31.640 --> 0:20:33.520 you know, we move up to four and a half percent, 0:20:34.320 --> 0:20:36.879 so another two percentage points from where we are today. 0:20:37.280 --> 0:20:40.040 What that basically means is you're looking at overall core 0:20:40.080 --> 0:20:44.480 inflation rising by roughly about another eighty basis points. You know, 0:20:44.480 --> 0:20:47.760 rents got about a weight, you go up two percentage points. 0:20:47.920 --> 0:20:50.240 That's about eighty bits on on the core cp I. 0:20:50.280 --> 0:20:52.840 Now that sounds like a lot, but you mentioned used 0:20:52.840 --> 0:20:56.119 cars earlier. They're adding over a hundred and thirty basis 0:20:56.160 --> 0:20:58.520 points to the core CPI right now in the year. 0:20:58.600 --> 0:21:01.720 Your basis that it's almost certainly going to come off. 0:21:02.119 --> 0:21:05.120 So even if we are goes up and rent goes up, 0:21:05.200 --> 0:21:06.920 you know, a couple of percentage points over the course 0:21:06.920 --> 0:21:09.800 of let's say, the next year eighteen months, that's almost 0:21:09.880 --> 0:21:12.120 certainly going to be offset to a great extent by 0:21:12.440 --> 0:21:14.200 you know, a lot of these things that we're seeing 0:21:14.240 --> 0:21:17.600 now that we you know, continue to think of transitory. 0:21:17.920 --> 0:21:19.639