What Is Really Going On With Rent and Healthcare Inflation?

on here? I still think that from an investor or standpoint or just someone trying to understand you account clearly like the sequential numbers are more telling. I wasn't, Tracy. I resent the insinuation that you think I would write, so I would never insinuate anything, Okay, but you're right, Okay, So people were expecting inflation to start to slow down a little bit, and that's why there was lots of talk about why you should look at the sequence whole

month on month data versus the year on year. But what we saw instead was basically, any way you slice the data, it looked disappointing. And where you going to defend month on month again? No, no, of course, I was just gonna say, ironically, the one the only measure that looked good was the completely unsliced headline data because that was so far dragged out, but the moment you did even the slightest bit of product under headline was like,

oh my god, raging hut. All right. Well, the I think the big takeaway from that number, other than it being disappointing, was the fact that we really see some of these price increases starting to spread from things like food and energy and more towards services. And services, as everyone is now finding out, is a big, big part

of the core index. And I guess everyone called this to like, I think last year they're like, oh, we're gonna have this big shift to services and yeah, sure, good prices will come down and bull whip effects and inventories and all that. But now it's here and it's like, oh man, this could be here for a while and it's not slowing down yet. Yeah, And I think the big question is how long does it take to feed into the index and how long does it take to

kind of go away? And there are different data points, and there's been some discussion of this as well. There's private market data points, for instance, that show rents are starting to slow, so when does that feed into CPI? Right, So, various online companies like a Zillo or something, they'll have a rent index. And this sort of gets to the question because, first of all, the thing that one of the big upward drivers of inflation and the last report

was rent. Everyone most people feel rent. It's like a very salient category. There are some categories that maybe are more hidden. Rent is not one of them. Shelter is not one of them. But then yes, there is this thing. So it's like, Okay, we have these private measures that seem to be rolling over a little bit, but the

numbers in the CPI keep going up. So is this the case where the CPI is just lagged like bad data or is it people are misunderstanding the relationship between the official government numbers and what some of these private surveys are ship Today we're going to be digging deep into those numbers, right, absolutely, So let's get right to it. We have the ultimate guest for digging into inflation numbers, and he knows more about like what these numbers actually

mean and how they're derived. I think you've talked to him several times, and you're reporting on like the minutia like you when you did like mayonnaise reporting, It's like, Okay, where is this in which index? And how much of this is like soy oils versus condiments? Like he knows everything. The way we measure inflation never ceases to amaze me. And there's just so much to say about the actual construction of the indicries and things that people don't normally

talk about but we probably should. Let's talk about them. We're gonna be bringing back to the show a past guest. O'mar Sharif is the president and founder of Inflation Insights, and he will answer all our questions about why some numbers are going up maybe some hopefully that go down. So Ama, thank you so much for coming back on the show. What's going on? When is the numbers going to start turning down? This is I thought inflation was transitor. I made a whole like you know, I was like

I was like on team Transitory. Now I look ridiculous. Um well, I think probably you know the turn of this year is because what I'm thinking is we're gonna start to see the monthly rate, especially the core, start to really kind of come off. I mean, we've been kind of stuck around point flat point six every month on the core pretty much for close to a year. Um, we haven't got a long relief, but I think that relief is coming from a few different areas, hopefully in

the next couple of months. Okay, I'm gonna clip. It doesn't matter how long it takes. I'm going to claim victory in five years of inflation comes down. Great. Um, okay, well, maybe we can talk about one of the things that people expected to start coming down and it hasn't, at least according to um last month's data, and that's used cars. Car prices, and this was one of the big drivers of inflation actually, you know, going up over the past year or so. Why haven't prices come down? This is

what everyone was expecting to happen. Yeah, so use car prices like a lot of things. Uh, you know, when prices cool sale prices are going up, they are just very quickly on the way up. When they are coming down, they take a little hell to come down. And so what we've seen, honestly all year long is that wholesale prices are down very, very sharply. You want to look at Manheim Black Book data and JD Power, which is

sourced data. Actually for the BLS um all of these things that are down, you have ten and eleven twelve percent depending on the indext over the last six seven months. Retail litt on the other hand, has been kind of roughly flat because a lot of sellers are not really pulling down the crisis. But we're starting to see that change, and really over the last six or seven weeks, I would say that that is starting to adjust. So model years, you know, two year old models, three row models for

those prices and retail prices are coming down. You can see this in the BlackBook Retail Index, for example, prices were down about two and a half percent in August. So all we're really waiting to see is that data translate into the CPI and the next we use cars and I think, you know, September it is a good point where that might enter, but I think October is probably the month you really want to focus on. September.

There's a lot of adjustments that are happening in September, but September October, I think is when you really are going to start to see the retail stuff on these cars in next start to come come off in the CPI and that that's going to be a big boon in terms of you know, getting that core weight quarter

and next lower. How do you actually go about, because this is your day to day business, how do you go about trying to measure that lag between you know, what we see in the market and what we actually see showing up in the CPI data. First of all, you're looking at these market industries, you know, whether it's span Him or Black Book, and you're essentially mapping them is at the wholesale level against the retail price index

for the CPI UM. Now, obviously wholesale, you know, typically defined as the strongest correlations, will be with wholesale changes feeding roughly about two months later into the CPI. Now what's really interesting is like before the pandemic, this was pretty much a constant roughly a two month lag, so eight weeks later, whatever happened wholesale typically showed up in

the CPI. What the pandemic did was completely throw these lags off to the point where you know, prices started moving at the wholesale level, obviously they're going up, and that immediately fed into retail like there was no lag whatsoever, and if you're one of five six percent of wholesale one month, guess what the CPI was going up five pc and use cars the next one. Now, what we're seeing now, I think is a little bit of a reversion to that, um, you know, the old lag of

about to shoot three months. And that's why I think. You know, we've seen wholesale come off the last several months, and people are saying, we wait, it's like on the CPI use cars index is you know, kind of unchanged or maybe up a little bit. So I think it's it's just the issues that the lags are are kind of back to what they were. This is sort of

like gasolute. You know, when gasing prices go up and wholesale level you feel it right away, and you see it right away at the pub when they go down, it's a very gradual decline, right you're kind of pocketing that extra margin. And I think dealers are doing the same thing and happened for a while. But I think that jig is up and should be over the next couple of months. So let's talk a little bit more

about this. And you know, I'm starting to like feel a little bit better about always big wrong on everything because I just got these measures, right, I look at trucking, look at cars, I look at the triple A gasoline. It's like, look, all these lines are going down. They should show up. Can you talk a little bit about why these legs exists, What is the difference between some of these measured prices and the government prices and what do you have any theories or sort of explanations why

past lags got disrupted? And so that the gap between private survey measures of prices versus what showed up in government data did not have the same temporal relationship as it used to prepand the temporal is a good word. Yes, I would I would talk about this with using you know it'll go back to use cars. Yeah. One is you know that in terms of the pandemic when it hit um, what you had was basically a complete disruption

in the use cars marketing. So it wasn't just that people demanded use cars because I say they were moving in suburbs or whatever. The biggest ship was You've had a natural seller in the used cars market. Car companies who became a net buyer used to vehicles and we really haven't seen that before. And what they did was they scooped up all the zero to three year models that they could to sort of replenish their stock. Um, you know, things came back a lot stronger obviously twenty

one that people thought. So take a company like Davis. They had about four hundred fifty thousand vehicles in their fleet in two thousand. That got down to about two d ninety thousand by the summer one, right when demand was booted, So they couldn't replenish them for manufacturers. They

ended up going to the use cars market. So what you found was pricing increases in the zero three year bucket, which is all build buy those price increases skyrocket and if you're a dealer trying to buy a car, you can't find these vehicles and you need to go out by four or five six yelds. So all across that age,

current prices spiked and it wasn't you know. I think the issue is just the magnitude was so large that you could really wait to price them out a retail right, So you're paying way way more than you were used to pay, and you had to pass that on a quickly. Uh. And so I think we saw those lads disrupted for that particular decide. Now on the way down, wholesales is getting a lot cheaper, you can still sell it for

a bit more on the retail side. So again, just like athlete, you kind of pocket the margins as long as you can on the way down. And I think that's what you're seeing. The other item I would actually mention where honestly I am, I'm pretty stumbdusted. What's going on is really furniture prices. Um. You know, we have seen you talk about, you know, trucking rates going down, um,

import prices of furniture going down. Inventories are jumped, while the big box retailers are telling you, you know, Walmart, Haargey, we've got too much of the stuff that we're discounting heavily, and yet the CPI is going up about one percent you know, every single month. Um. And there, you know, typically you would start to see the stuff coming through pretty quickly. I've honestly been winning since March or April for furniture to really slide, and it just continues to

sort of defy, um, defy expectations. So there, I don't have as good as an answer in terms of what's happening, but we know all the signs are planning to the fact that they should be dropping, and the industry will tell you that. I mean, you read any furniture industry trade publication like I started doing when I was wrong on furniture for a while, Um, you know, furniture to a magazine will tell you, hey, they're preparing for recession.

They've got too much stuff, they're discounting, orders are declining, and yet the CPI is that showing it. But I will say one other thing to think about is some of these samples in the CPI are not that large furniture. If you're talking about bedroom furniture, they may only have a couple of hundred quotes in the entire sample versus you know, thousands for something like rent um or you

know thousand for airfare. So the smaller sample, the larger, you know, the chance that you'll have some some errors, you might miss some of the price changes, you know, particular much so that can also impact the lads that occur in the CPI. So, I mean it is true on the whole, the goods inflation has been going down. So I think it fell from like ten points seven you know last year to seven point one last August.

And meanwhile, services, as we mentioned, is starting to pick up and services correct me if I'm wrong, but I think it's something like triple the weight in the core indux something like that. Can you walk us through, like a why do services get that much weighting and be how significant is it for the core index that it's now going up? Yes, so, I mean the bulk of that weighting is is Shelter. It's it's rent and its

owner's equivalent rent um. You know, in the core CPI, where do you present the entire core is just rent? You know, we are combined and so within services, you know, the bulk of the weight is coming from from Shelter. So that's really what's driving UM that overweighting, if you will, to services relative to two goods. The fact that it is going up so dramatically, you know, that's obviously been an issue for the core UM. I would really say

probably since since early spring when Shelter really started to accelerate. Now, you know, one thing I want to mention UM is that we I think the Shelter story, honestly is something that most people knew was gonna happen coming into this year, right, you mentioned some of these private market in the seas like apartment lists and Zillo and so on. They were showing these huge games and rents, you know, late last year, last spraying, last summer, so we knew that this was

likely going to enter in the CPI this year. The question was always about magnitude, so whether it was going to be up six percent this year or seven percent, which looks like we're headed for that some number. Um. So to me, like, that's not really a surprise. On the services side, I think most people who tracked this stuff closely realized, hey, reds are gonna be up a lot this year, probably someone in the six summers a range.

It's the other part of services and the non shelter service stuff that I think is the more interesting part of the story, and they're what you'll find is a lot of people talking about how wages are driving those services up. Um, you know how um all of these other costs in the non shelter services, those are the sticky elements of inflation. And until that stuff starts to roll down, you know, it's gonna be really hard to

get correflation down. I would actually sort of counter that a little bit by arguing that a lot of what you've been seeing, and this has been true since really last probably I would say fall, is we've had a lot of oscillation in that non shelter service employment, and that's mostly because of sort of the economy reopening and closing and kind of fits its first. So summer of twenty one, if you remember, airfare started to jump very significantly,

started traveling a bit again. So a lot of what was driving services at that point was actually things like affairs and hotels. It wasn't medical care services, it wasn't recreation services, you know, it was really personal care services. It was these sort of reopening categories, if you will. Then you had you know, I think Delta was was later in that year. Prices for those categories spell the

non shelter services inflation actually decelerate very sharply. So basically what you've seen up until really pretty recently, it's just this quarter to quarter oscillation that's been going on in the non shelter um services in next really just reflecting kind of the economy reopening and then slowing down. And we got the same dynamic to spring, by the way, when the airfare spite and now they've been down the last few months, and so the non shelter stuff is

kind of moderating a little bit again. So let's talk a little bit more on rent specifically for two reasons. A because it is such a big part of uh, you know, core cp I, but also it's one of the most like people feel it and people complaining. Certainly in New York everyone is aware of just like how

brutal the rent market is. But also elsewhere you mentioned there, we sort of had reason to think that this number was coming in part because the private surveys, We're flagging this several of like maybe even a year ago, the Zillois and all this. So for there reasons, one big question which is like, is the data stale? And at a time when people are worried about, oh are we going to create is the Fed going to create a recession? Is it being too aggressive? Uh? In light of you know,

is it whatever? Is it operating on old data that's not as timely as what the private sector surveys are showing. Is the public data stale? So I wouldn't necessarily say it's scale. I would just say that it measures something different than what these private sector indussees are measured. So most of these private sector industries are measuring new leases.

So when you think about moving into a new apartment beside a brand new lease, that's what they are capturing and capturing that change in the right for that unit with a new tenant versus whatever it ready for for for the last ten And that's true of all most of these apartment list of lists on and so it's really just one segment of um the market that those private private measures are capturing. The CPI is capturing the entire rental markets. So it's not just people who are

looking for new apartments were signing new leases. It's also people who are renewing their lease, and it's also people who are currently renting and still all on the same lease they were, you know, five months ago. So they want to capture the entire market versus just a slice of the market. So in that sense, I don't think it's stale. Now that said, you know, when you think about is a FED operating on old day, we do.

We do know that it lacks right before this very reason, it doesn't capture the BLS, doesn't capture turning points in the market as as well as these private sector measures. Right, if if something is changing in the marketplace, those new lease the way those new leases are changing is gonna be a much better indicator what's happening then than the CPNI. That's true. But it's not as if the Fed number one doesn't watch their private sector measures, not that you know,

they don't understand the lags. I mean, if I understand the lags that rent and other people do, I promise you the folks that the FED do as well. Uh So, I don't think that they are you know, sitting here working on on the sort of lagging indicators if you will, because they are. They're capturing in a huge amount of data to look at what's happening in India shelter um

and they also kind of see where shelter is likely head. Right, These private sector measures have started to roll over the last you know, depending which one you want to look at, four to seven months, they've been slowing down quite a bit. So another thing related to housing and the cost of shelter, which again it seems important because of the way and just how much, not how important it is for the public.

We have seen a clear slow down in anything related to home buying and home purchasing, and of course that isn't I don't believe is that captured directly historically speaking? Is there a relationship or a stable relationship between activity and the home purchase market. The price of a house, the price of a monthly mortgage, which is shot up if you're just if you're buying a house today verse a year ago, and then what feeds through into rent prices? Can I just say that was going to be my

next question. We've been working together so long, we always do that, We keep asking the same questions, But can I tag onto that? So one thing I've heard is there are some people who say that, like interest rates going up could end up increasing the pressures on rent because more people decide they're not going to buy houses right, They're going to stay where they are, keep renting an apartment and things like that. Yeah, so on that latter point, yes,

that's that's very possible. Um, you know, if it's getting too expensive to get a mortgage, or you can't find a house to buy, you renew your lease, or you you know, are moving into the apartment, that certainly can actually push rents up in the short term until supply does eventually catch up. But yeah, that's that's very possible. We've seen that happen before. Uh, in terms of the idea of you know, the housing market and and her

versus activity. It really is kind of what you're talking about, which is the knock on effect on the rental market. That's really the way it's going to feed through into the rent index because you know, contrary to popular belief, like, house prices don't play any role whatsoever in the CPI at all, um, even though owners Equivalent Rent Index, you know,

it's not intended to measure house prices. It basically is using the contract rent data that they capture and sort of you know, rejiggering it a little bit to to come up with with, oh, we are but no house price goes into the index whatsoever. The mortgage inter stuff, you know, it used to actually be in the CPI prior to nineteen eighty three because they just it was

a very different methodology back then, UM. And so when when rates were moving higher and the cost of servicing your mortgage moved up, that price actually was reflected in the CPI back in the day. Um. But in nineteen eighty three, there was a lot of different problems with it um and they ended up switching out to this new method of rental equivalence in net eight three. So now that doesn't really play play much of the role again other than the knock on effect on the rental

market in most houses. Is that how Vulcar defeated inflation removing mortgage trains from It's like, we want to raise rates to fight inflation, but our current measure of inflation includes mortgages. Got to change the rules because otherwise our rate you can regime won't help us at all. So actually, in that instance, because of the rate increases, mortgage interest costs in the CPI skyworketed and actually the inflation higher.

So even though he was boost in rates at the same time you would think, okay, high rais you should or inflation. In fact, inflation was moving higher partly because mortgage interest costs were so much higher, and there was a lot of problems with the idea of mortgage interest costs. I mean, they knew about mortgage interns costs, and the problems with sort of putting it into a cost of

living index. A lot of what you you know, a lot of issues that people have with the CPI, whether it's rents or other indexes is really about the constant of how you design it, how you think about what you should be capturing, and that fundamentally gets back to the idea of you know, what is the purpose of the CPI, and it's intended to be a cost of living index UM And you know, they knew back I think it was in seventies they had papers out the b LS saying, look, we need to get away from this,

you know, mortgage interest costs because it doesn't really fit the way that we're supposed to construct a CPO. You know, you could do a whole separate episode on that, but I think the short version is in three in eight three they decided to say, hey, we've been talking about this rental equivalence method for many years now, and we

think it's the right way to do it. By the way, I will just say, very recently, UM National Caademy of Sciences basically put out a report that said, you know, here are our recommendations for improving the CPI in the coming years. And they talked about looking at, you know, these private measures of rent as potentially trying to incorporate them into the CPI. But they said up until then the best measure that we have is really the rental

equivalent method that we use today. Um, let me ask a slightly less provocative question, um, other than how we measure or don't measure mortgage interest in CBI. So historically, one of the reasons we focus on rents is because people feel them. Um, they're a big component of the of the core index. But also because rents and wages tend to be tightly linked. And I think there's concern that as rent inflation accelerates, are we going to see

that knock on effect into wages. What are you seeing there? Yeah, as you said, it is a pretty tight fit. I mean, basically, I would saying labor income and and rent growth are are pretty tightly correlated. Um. You know again, I think as rents have gone up, they correlated well with this

improvement in wage growth. One of the interesting sort of tickets is that a lot of even though rents are rising, a lot of people who are reapinger pleases are actually or side new leases in you know, sort of more profess she manage department buildings. So more of your large multifamily in the buildings are actually showing that their incomes

have increased pretty significantly over the last two years. So even though we talk about you know, the idea of a lot of people getting priced out because rents are rising so sharply, people who are citing new leases and having to provide the paperwork from their bank statements or or you know, their their employment information are showing that

incomes have actually also increased pretty significantly. And so I think, you know, as you start to see wage growth decelerate a little bit, which is already starting to happen at the margins um. You know, people who manage these apartments sort of they get this kind of real time flow of what labor income looks like. And I think that's partly also why you odesty rents start to decelerate is because they're not reasoning rent six percent when they see

labor income only. Yeah, let's say it's where did you get where's that data from? That the people that the cohort that is turning new leases is actually seeing wage games that are keeping up with rent. Yeah, and that comes from real page um. And that's another you know, large sort of private market provider of everything from rent

data to all sorts of information on multiply buildings. Um, and so they've been tracking this and sort of publishing you know, stories on this for the last I think about eighteen months or so, just this idea that even though rents are are moving higher, people are able to afford those rights because their incomes are arising alongside those those rankings as well. So one other question on rent before we go off it, and again it sort of

connects to uh broader housing questions. Uh. A lot of people I think, in the last couple of years when rates were low, bought houses as investment properties and maybe don't want to sell right now in part because there aren't a lot of buyers who are excited about the sticker shock of what a monthly mortgage now cost them. Could this bring more rental supply to market in your views, like, well, I can't sell it, so I rented, and could that

have a dampening effect on rents? Yeah, very possibly. I mean, most indusseries don't trap single family rentals. The only one that I'm aware of that does is it's either zill or poor logic. It's one of those who has a single family right index where they do track what rents are specifically for that sort of you know for that type of rental um. And yeah, obviously if you can't sell it and you want it as best investment property, it makes quite a lot of sense given that, you know,

demand is still pretty robust for for rentals. Vacancy rates have only barely started to edge higher from the lows that we saw, you know, even six months ago, so there's still quite a lot of demand out there, So it makes sense to do that at this stage. And yeah, hopefully that can help bring at least that one segment of of rent of the rental market down. And by the way, that is also captured in the CPI, right, the CPI isn't when we're talking about rents, it's not

just apartments. They also to capture um single family rentals in that entire sample as well. So we've been talking a lot about rents um which have been pushing services up higher, but are at the point you've been making, are expected to start to decrease sometime soon, or at least the rate of acceleration will start slowing down. Talk to us about another big change that you see potentially on the horizon that has to do with healthcare. Yeah, so this is another one that I think is it's

coming very soon. It's gonna it's gonna help everyone looking for that transitory in place story. Yes, you know kind yeah, so, um, you know, right, as I mentioned the biggest part of the course, the second biggest component is medical care UM. That's worth just about of the court. And for the last year, medical care has been rising in about, you know, roughly zero point five percent in each month, which means it's been adding about five basis points to the core

change every single month. That's been very set. It's kind of like clockwork pretty much all all of last year. UM. Starting in termre that index is going to turn negative and it's gonna turn negative in most months over the course of the next year. And so what was a pretty constant um source of a boost to the core every single month is actually going to turn into a relatively decent drag on the core. And you know it's

not because medical care is getting cheaper or so on. Uh, this is actually just one of these works in the methodology that you kind of have to be aware of, UM, and it comes very specifically from the health insurance index within the broader medical care gage. Well, what's the me So what is that change that's coming. Why is it's what is going to switch from pushing up to being a drag. Yeah. So so the story is basically that first of all, health insurance is updated once a year,

typically in the October used to be September. Last year was October. This year will be in the October report again um. But this data lacks by almost about a year UM. So the BLS takes the state of and this is from an official source, the National Association of Insurance Commissioners, So this is sort of you know, they put out a big report on how much in premiums has been collected and how much is being paid out and how much is retained by insure. So this is

kind of the holy grail of this data set. Unfortunately, it doesn't come out until that ten months apt into the year, and so what we're really capturing this October is going to be activity that happened in two thousand twenty one. And so what's can happen here is that if you think about and during the pandemic, people you know,

put off things like elective surgeries. They didn't go to the doctor because people didn't want to be waiting, you know, in waiting rooms with other people who might have COVID, right, so there just wasn't a lot of utilization of healthcare services. To US twenty premium income continue to increase, but the benefits paid out actually declined. The way the CPI captures health insurance is by looking at the change in these retained earnings for insurance from one year to the next,

and you know very quickly. The reason they do this is because it's really hard to price health insurance from one month to the next because policies are changing all the time. Right The what what a policy will cover will be could be changing quarterly, monthly, you know, each year, the risk factors that go into the policy can change.

So when the billness is pricing any good or service, they want apples to apples from one of months to the next, and if something changes, they want a quality adjusted. But in healthcare and health insurance, they found that's just

way way too hard to do. So the roundabout way of this indirect way of capturing the price to you, the consumer of health insurance is basically, what does it cost the business to offer you health insurance if they're also administering health services or health insurance is rising, you'll probably see that in your premiums, and so the way they captured this by looking at these retained earnings and how they're changing from one year to the next. So

during the pandemic, premiums kept rising. However, benefits paid out to people went down quite substantially because of COVID and the lack of utilization of healthcare. So what you saw

was a huge spike in retained earnings. And what that meant for the cp I was that in October of two thousand twenty one, which reflective is health insurance jumped by two in the month of two which means that basically, since you only updated once a year, it's effectively going to print right around two percent every single month like clockwork. Until the next Sunday fast forward, people started, you know, going back and taking care of these elective surgeries and

utilizing healthcare much much more than they did premiums. It really changed to dramatically. So now you have a SIS match again where way more utilization of health care than you had, and so then those retained earnings dropped on a year a year basis. So what's going to happen now when you update it is that you're going to have a very large drag. So health insurance, which has been two months pretty much for the last year, is very likely to print in an October report around minus

four percent. You know, on the surface, you say, well, plus two to minus four that doesn't really sound like a lot, but if you kind of put it into context, it actually is is kind of dramatic because number one in the month of October itself, that alone is worth almost a seven basis points swing on just a course tPON. So if you're forecasting let's say the core and you get a point forward in October, you're probably looking at something that's more like a point through instead, just because

of this movement in health insurance. And you know, that's kind of the difference between a five percent in realize rate and you know something that's more like a three and a half percent in US. So that's a pretty big gap. The other issues here. On a year a year basis, health insurance currently is about twenty five percent year year because of the steady you know, two percent

hours every month. When the next report comes out September, which is sort of the last herald before it, terms of negative will probably hit at once this minus four comes in in October and it stays here for the bulk of the year. By September three, Health Insurance I suspect we'll go from plus twenty eight to about minus four. Ye're here. That swing is worth almost about any basis

points on the core CPI. So you have an index that's worth just over one percent of the entire course CPI that by itself will subtract almost a full percentage point from cornflation. An extreme that's is so crazy to be because the whole point of like measuring the stuff and then mondetary policies like countercyclical and this huge component as you just described, it has no there's no actual

like economically cyclical impulse part of it. Well, this was actually going to be my next question, and oh, Mary,

that was absolutely fascinating. And the thing about qualitative adjustments was something that I only like really discovered this year, so I didn't know the BLS, you know, if they're looking at the cost of a refrigerator, for instance, will take into account technological advances on the cost of the refrigerator if it now comes with I don't know, WiFi connectivity or something, yeah, blockchain enabled fridge um and they will factor that into the c p I. But I

mean this gets to one of the major criticisms of the indices themselves. You can kind of see what they're trying to do, so it's difficult to measure qualitative improvements in things like healthcare insurance. But on the other hand, it does lead people to look at these things and go, well,

what are we actually measuring here? And isn't it weird that the cost of living, you know, as measured by the CPI, which includes rent, healthcare, food, energy, whatever, can change just because of like the way this one thing is measured retained earnings versus the way we measure goods and things like that. What do you say to that criticisms It's fair to to make those sorts of criticisms.

I guess I would say couple. One thing is that you know, this is never a static process in terms of the methodology, so the BLS is always trying to improve upon whatever is that they're doing. A good example of this something like new vehicles. Um just in April of this year, in fact, they introduced a brand new methodology for capturing the price of new vehicles. So before they used to go to dealers figure apples selling, you know,

try to capture those prices. Now they're using a massive data set from Shady Power, which captures you know, essentially real live transactions that are occurring. So they've updated that quite in the forget me to really reflect kind of the conditions on the ground for people who are providing new cards. So there's always there's always this sort of, uh, you know, goal to improve upon the methodology. So that's

that's number one. Number two is you know, you kind of do the best you can with what you're given. And by that I mean that a lot of these things are subject to things like budget constraints. Um, you know, when we talk about the rent for example, the BLS, if you survey a unit, let's say in January, and you say, hey, how much you're paying the rent? You come back to that unit, you don't come back to in February or March rate whill you come back to

it in July six months later. Part of the rationalist because you know, rents don't change a lot in terms of the contracts, so six months seem like an adequate amount of time. But the two other reasons are one, respondent burden, Right, if I'm knocking on your door every single amount asking where the rent is, you might be less willing to participate in the survey. But the other is also there's a budget much terry constraint involved here in terms of you know, sending people out into the

field to capture a lot of these data sets. Um, so that all of these things sort of constrain what uh you know, the BLS can ultimately produce in this particular instance for health insurance. You know, I can sort of understand a bit more of the criticism, but the issue here is really the data is just black ten months. Um, we can't do anything about that. I mean, the data that they are getting is from the National Association of

Insurance Issues. And if you think about capturing all of the premium inverture, all of the claims that are paying by all of these health insurers, you know, it just takes up for for the last year. It just takes a while to put those numbers together. So this is just something with the BLS just has to wait on the data that they're capturing. Again, this that data set is you know, effectively like the bible for for health insurance data, right, and so this istance they can't do anything.

They just have to wait until that's produced. UM. So I think you know, in some instances that I get the criticism. I just think you've got to understand that they were working within a number of different constraints, UM, and you know sort of take that into account when you're thinking about criticizing them for particular approaches, UM, in

terms of, uh, you know, how they constructed it. Can we do a live event if you wondering where people throw out a CPI category and then you like on the fly explained No, I serious, people would love to explain how it's constructed because we could this. We could just talk forever on every category. I found this conversation. Seriously, Can we can we do that someday? Yeah, there's you know, there's uh two hundred forty three individual components and the CPI.

I love it. I think I've got most of them down that we could probably do that. Other facts and oils, including peanut butter. Yeah, I can. I didn't say. I didn't say we could do the PPI. Okay, that's true. Wow, you actually knew that was a PPI code versus the CPI. That's verysive. We talked about one final thing. I just wanted to be showing the self insurance stuff is that

you know. Part of the reason why I think it is pretty important is because this to set uh, the official report is coming out and thinking about a week. I tend to use separate source, which is you know carverage quite well. But basically, you know, my feeling is that folks who are either treating in place shan or who just generally following play shit are pretty unaware of this,

this change that's coming. So this is gonna be something that you know, is at the margin going to help the FED month over month for the next year, along with I think the coming to kind of used cars. So really Q four potentially is shaping up to to see some lower core inflation. For instance, I'm going to spike the football at the end of Q far well Mer Sharif. Thank you so much for coming on. Fascinating conversation. Always love chanting with you. Always learned something and we'll

have to have you back again to thank you. Take care of Thanks. That was great. I love talking to I always learned so much sitting as said, the fact that he gave me, you know, the like throws, these little like bits of red meat for team transitory. I just actually like learning about this, Like I had no idea how they captured health to church. That's so interesting to me. Yeah, So I think I have maybe three

major takeaways from that. Like one, it's just crazy how much of the market and our daily lives are linked to the construction of this one index, and hat well't I mean it's multiple indexes, but p p I c p I and how it works, like think about all the payments, Treasury link securities, things like that that are linked to c p I, and so much of it depends on the individual construction. And then the second takeaway, you know what he was saying about the time lags

and how COVID kind of messed those up. I think is a really good way of looking at why there's been so much confusion over inflation. And Then thirdly, this is something that I'd heard before, but the resource constraints on the BLS in terms of a set bling some of this data and trying to adjust it. I think that is maybe an underappreciated factor over the past couple

of years. Well, and especially like some of these some of the stickier prices within goods that like, of course these should come down right, because we have every big box retailer saying we have tons of inventory. The housing markets slowed down, so it's like all kinds of reasons to think, yeah, we should be seeing some deflation and furniture, it's not happening. But then he says, oh, they you know,

maybe they only contract a couple of hundred in the survey. Well, right, if your survey respondents are like the big box stores that have pricing power, still have pricing power for a while, then it'll be sticky. Now there's something, and we should at some point do an episode on when they changed

the rules of inflation, because they look, it's crazy. I think that, like, you know, forty years ago, if they raised great that mathematically raised measured inflation because interest in mortgages was including the CPI, which is also like kind of maybe intuitive to a lot of people. Well, it's one of those things like you can see why they would do it, but on the other hand, it also seems odd if you think that CPI is supposed to measure the cost of living. Fascinating stuff. Yeah, we can

talk about this for a long time. Okay, shall we leave it there. Let's leave it there. This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe wi Isn't All. You could follow me on Twitter at the Stalwart. Follow our guest Omer Sharif He's at f Cast of the Month. Follow our producer Carbin Rodriguez at Kerman Armine, and check out all of our podcasts Bloomberg under the handle at podcasts. Thanks for listening.