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