Latest / The Overlap / The Number Nobody Pays: How Phantom Rent Runs the Economy

Transcript

The Number Nobody Pays: How Phantom Rent Runs the Economy · The Overlap

0:00
The Bureau of Labor Statistics rec released a July Consumer Price Index
0:06
on August twelfth, which is the day that we're recording this at 8
0:09
30 in the morning. The headline number came in at 3.4% year over year inflation.
0:16
Core CPI, excluding food and energy,
0:20
hit two point five percent. Markets moved.
0:23
The Federal Reserve was watching.
0:25
Or at least that's what we're supposed to believe.
0:28
But here's what
0:29
made the number actually interesting.
0:31
Nearly two thirds of that monthly increase came from one category shelter,
0:37
not gas, not groceries, shelter.
0:41
A single component of the index accounted for the bulk of the signal
0:45
the Fed is using to decide whether you can afford to borrow money,
0:49
whether your paycheck needs to stretch further,
0:52
whether the economy is running too hot or too cold or on the process of cooling.
0:58
Except shelter in the CPI isn't measured the way you pay for shelter.
1:04
It's not your mortgage. It's not your actual rent cost.
1:08
It's something called owner's equivalent rent.
1:11
A hypothetical number that represents the rent homeowners think they could charge
1:16
themselves if they rented their own house to themselves.
1:21
Number one actually pays it.
1:25
The Fed watches this one number.
1:26
Your rent is
1:28
And your mortgage bill lives somewhere else entirely.
1:50
Hey there, I am Joshua.
1:53
And I'm Will.
1:54
And this is the overlap. Will's back,
1:56
you guys.
1:57
We're glad to be back, Joshua.
1:58
Thank you.
1:59
Glad to be with ya. Why don't you tell the our our guests,
2:04
our wonderful audience, our beloved,
2:06
esteemed, good looking, talented audience what we're talking about today.
2:11
Well as you probably heard in the intro,
2:12
we're talking today about the CPI,
2:14
or consumer price index report that landed this morning,
2:17
and why the inflation number everyone heard isn't actually the number that's driving
2:21
policy.
2:23
Right. So yesterday, like I said at the at the the intro,
2:26
the Bureau of Labor Statistics puts out July's inflation data three point four
2:32
percent year over year. That's the headline that everyone saw.
2:37
But if you actually look at what moved that number and like actually look at it,
2:43
it's not just the press release.
2:45
You find something pretty crazy about how the government measures inflation.
2:50
And how far that measurement has actually drifted from what people
2:54
are really feeling?
2:55
And why does this matter beyond just being a data nerd complaint?
2:59
Because the Federal Reserve uses that number,
3:02
or at least some version of this number that we're not allowed to know,
3:05
like a credit score, to decide what interest rates look like.
3:09
And that decision ripples through everything.
3:11
Your mortgage rate, your credit cards,
3:13
your car loans, whether employees are our employers,
3:18
sorry, are hiring, whether they're they're cutting jobs,
3:20
they're laying people off. It all traces back to how they're measuring inflation.
3:25
And the way they're measuring it is to be
3:29
charitable I guess, not connected to how any of us actually live.
3:33
Surprise, surprise. But you mean this is like the number that will help determine
3:37
when you go to the grocery store and everything's ten percent more expensive than
3:41
last month, but the government says inflation has eased?
3:43
Exactly that. And we talked about it in it last episode actually.
3:47
If you if you didn't listen to it,
3:49
go back and listen to the episode ~ talking about democratic socialism.
3:53
But it this is kind of a a specific reason that shelter is measured the
3:59
way that it is. And it really goes back about forty years.
4:02
It always goes back forty years because that's what we do,
4:04
right? We connect things that are happening now to things that happened in the past.
4:08
And there's a specific reason that the Federal Reserve is using a different
4:13
inflation metric than the one everyone actually talks about.
4:16
And that's kind of deliberate too.
4:18
And and both of these things are sitting on top of each other right now
4:21
in a way that makes the official story and the kind of lived experience really
4:27
incomprehensible to each other.
4:29
Well it's a good thing we're here to pull that apart.
4:31
Right, exactly. So before we were even born in 1983,
4:38
before I was born. Well, you were born before then,
4:39
Hm. Ancient times. Ancient times.
4:40
right? 82. Back in the day. It was a Tuesday.
4:42
Yes. It was a harsh life.
4:47
But no, in in 1983, the Bureau of Labor Statistics made a decision about
4:51
how to measure housing costs inside the consumer price index.
4:56
Now, if you don't know what the consumer price index is.
5:00
at the time the way they did it was kind of straightforward.
5:03
They just measured the actual home sale prices and you wanted
5:07
to know what homeownership cost.
5:10
You you tracked that, like what people paid for houses,
5:13
which makes sense, right? It sounds like the most obvious way to measure
5:18
the cost of housing.
5:20
So of course they stopped doing it that way.
5:22
Right, and for very different reasons.
5:24
So they did stop doing that. They they switched to something called
5:27
the owner's equivalent rent. The idea is that instead of measuring what
5:31
a house actually costs, you measure what that house would cost to rent
5:37
if the owner rented it out for the price
5:39
Yeah.
5:40
that they felt was reasonable.
5:41
I I don't even know how they measure this,
5:43
but then you're basically comparing the cost of owning to the cost of renting.
5:50
And you're measuring the difference.
5:51
So in theory, if owning a house becomes more expensive relative to renting,
5:57
owners would start selling and landlording those houses out,
6:02
which would theoretically drive equilibrium.
6:05
It's not exactly an elegant theory,
6:08
but it is a theory.
6:09
Right, but nobody actually pays the owner's equivalent rent,
6:11
right? I mean we're talking about a hypothetical number.
6:14
It's it's it's this seems pretty far removed from reality.
6:18
Exactly,
6:19
because i it's supposed to be some sort of balance.
6:22
But number one, i it's hypothetical,
6:25
right? It's a number constructed from surveys where they ask people
6:29
who actually own homes what they think their house would rent for.
6:33
Gabriel Chottero Reich at Harvard has done a lot of research on this.
6:38
He he found that the the BLS, that's the Bureau of Labor Statistics
6:41
for those TLA people out there,
6:44
three letter acronyms, it's constructing
6:47
A phantom rent that doesn't actually exist anywhere in our actual economy.
6:52
So your mortgage payment doesn't actually get measured,
6:55
even though it should be. Your property taxes don't actually get measured,
6:59
and let's be honest, it really should be.
7:01
The actual price you paid for your house doesn't even get measured.
7:05
What gets measured is a survey that respondents guess about
7:10
a hypothetical rental situation that will never actually happen because they live
7:15
in the house.
7:16
Not to mention that people are often deluded about what their property
7:19
is worth or what their things would be worth to someone else.
7:21
~
7:21
exactly.
7:22
in all sorts of directions. But why why would they do this?
7:26
Yeah. The official reason that they give is that it gives you
7:30
a measure that's comparable between renters and owners.
7:33
Does that sound confusing? Because it feels confusing.
7:37
It's yeah.
7:37
So ~
7:38
a renter pays rent. An owner,
7:41
in this this wonderful, beautiful fairy tale logic,
7:45
should be treated as someone paying themselves rent.
7:50
It kind of
7:51
smooths out the volatility of actual home sale prices,
7:55
which do in fact swing very widely.
7:58
If you've ever bought or purchased a home or sold
8:00
Yeah.
8:01
a home or were trying to purchase a home,
8:04
you know that the numbers just don't seem connected to reality.
8:07
Right.
8:08
It gives you something more kind of stable,
8:10
I guess, to put inside of an index,
8:12
which that's the goal of an index.
8:15
It's like an average. And honestly,
8:17
for a certain kind of economist,
8:19
and they're sure there's at least one of you listening out there,
8:22
it feels more theoretically pure.
8:25
You're not really measuring asset prices,
8:27
you're measuring the service of housing,
8:30
like the actual roof over your head.
8:33
But first of all, let me just say when you s when you use the word smooth
8:36
out like volatility, ~ thanks in no small part to this podcast,
8:41
~ alarm bells go off in my head,
8:42
like why would they be smoothing that out?
8:44
Like what who else stands to gain from that?
8:46
But I have a different a little bit different question.
8:48
If home prices spike and the Fed wants to know whether inflation
8:51
is happening in housing, they're not gonna see it under this new model,
8:54
right?
8:55
Right, they're
8:55
not and and I do wanna be ~ I wanna be ~ not just honest but like give give true
9:00
accounts for for someone who who crunches data,
9:03
right, and is not necessarily worried about about the actual outcomes
9:07
of lives and the the feelings and the people who live in the
9:10
the numbers that they're talking about.
9:11
It makes it easier to compute because otherwise it just it's just th you
9:16
can draw a line through all of the data and you try to find the mean in all of it.
9:22
It it just makes it easier.
9:24
To give real world results. Now,
9:26
you know, mathematically, I think of this like code and I think of it in functions.
9:31
And I'm like, well, that just means that the answer is not a number,
9:34
it's a function, and and we should be okay with that.
9:36
But this helps put it into more of a of a an average that they can
9:41
use and benchmark even if it's n not necessarily accurate.
9:47
And
9:48
They wouldn't see it the way you'd necessarily experience it,
9:52
right? In in nineteen eighty three when they made this switch,
9:54
home prices were crazy volatile.
9:56
Like inflation was crazy volatile.
9:58
~ my my mother in law worked at the time in in home loan mortgaging
10:05
and
10:06
the there were there were double digit numbers on interest rates at the time.
10:12
And so they're like she has old forms that would have,
10:15
you know, two two places for the interest rate.
10:18
~ whereas you know in our adulthood coming up,
10:23
we've never really seen double digit interest rates on mortgages,
10:28
especially. ~
10:29
Mm-hmm.
10:30
it's usually been confined to single digit rates.
10:33
It's something to seven to eight percent was the average when I first entered into
10:38
the housing market. ~ but you know that's that's neither here or there.
10:43
I I kind of get why they wanted something stable.
10:48
But by switching from the prices to this constructed rent,
10:52
they basically created a measurement that lags behind reality.
10:56
So if if real housing costs go up,
10:59
which if you own a home, the things that go up are your you know,
11:03
your not your mortgage, your mortgage is fixed,
11:05
but your insurance goes up and your your insurance goes up and your taxes
11:10
go up and and all of those things mean that you're actually paying more month
11:13
to month, regardless of the fact that your mortgage isn't changing.
11:17
But if
11:19
Based on surveys and like lagging data and models,
11:22
that's what actually gets to the important part,
11:26
right? Like housing got expensive.
11:27
Very expensive, and it continues to get higher month to month.
11:30
But the CPI shelter component keeps kind
11:34
of roughing over,
11:38
sandpaper, if you will, ~ that reality with a number that nobody actually pays,
11:44
it disconnects itself from reality.
11:48
And that's been the status quo for roughly forty years.
11:51
~ gross. ~ that because that was just one year before I was born.
11:55
Well, yes. ~ for forty years the the main measure of inflation that the
12:00
Fed and the public both use has a built in lag
12:06
on the biggest expense most individual human beings have in the United States.
12:12
And really no one talks about it because it's technical,
12:16
right? It's buried
12:18
In the methodology, in the formula,
12:21
because the alternative sounds more elegant,
12:23
but only in theory and only if you're good at math.
12:26
Right, and as you mentioned, when you're living in the mathematical abstract world,
12:29
this seems like a lot easier to compute,
12:32
but when actual people are depending on the the numbers and what they imply,
12:36
there's a cost, practical cost to this,
12:39
right?
12:39
Yes,
12:40
that's exactly right. It costs something in the practice of it.
12:43
Because shelter is now about thirty five percent of the the CPI basket,
12:50
like the entirety of the consumer price index,
12:54
thirty five percent of it, that's more than a third,
12:56
is the single biggest weight of the average person's burden.
13:01
And if that weight is systematically understating the actual costs of housing.
13:08
Then the entire index is undershooting the inflation that people
13:11
are actually feeling.
13:13
Right, so this methodological choice they've made,
13:15
~ which is to measure something that doesn't actually exist,
13:18
~ now that we've had it for forty years,
13:21
there must be some kind of consequences we can point to and see how
13:24
it affected real people, for better or worse.
13:26
Yeah, it i it it has
13:28
for sure, it has had consequences.
13:30
And they actually got worse in nineteen ninety six.
13:33
~ the Senate Finance Committee commissioned a study on whether
13:36
the consumer price index was overstating inflation.
13:39
It was called the Boskin Commission,
13:42
named after the chair, Michael Boskin.
13:45
Their their ultimate conclusion was pretty direct.
13:48
The CPI overstates inflation by about one point one percentage points per year.
13:54
It's not a tiny amount when you're talking about a an average of
13:57
a three percent annual. Like that's more than a third.
14:00
Again. ~ we're talking ~ about a third of of headline inflation just being
14:07
incorrect, being wrong.
14:09
And what did they base that conclusion on?
14:11
They looked at the at substitution bias.
14:14
It's the idea that when prices go up,
14:17
people buy different things, cheaper things.
14:20
And the the index doesn't fully account for any of that.
14:23
They looked at the hedonic quality adjustments.
14:26
The idea that when a product gets better,
14:29
its price increases isn't really an increase because you're getting something
14:34
better. ~ to kind of restate that,
14:36
they looked at at outlet substitution.
14:39
This idea that people switch
14:41
where they shop. They go from Target to Walmart.
14:45
They go from ~ JCPenney to TJ Maxx,
14:50
right? Like they all of these things are defensible in theory.
14:56
The problem is that the commission used these ideas to justify new methodologies,
15:01
new calculations, new ways of coming to these numbers.
15:06
And those methodologies, once they were adopted,
15:10
had a direct
15:11
Policy consequence.
15:13
I could guess that whether that's a good or bad consequence,
15:15
but I'll just let you tell us.
15:17
Which was it?
15:17
Yeah, I mean it
15:18
it's almost never good for the average person,
15:20
right?
15:21
Right.
15:22
Co cost of living adjustments for Social Security,
15:24
colas, the way which is what the way cost of living adjustments,
15:29
the way that social security payments adjust every year,
15:33
is directly tied to the consumer price index.
15:36
So if the consumer price index is wrong by one point one percentage points,
15:40
then Social Security is paying out one point one percentage points more.
15:46
Than the government thinks that it should.
15:48
It's almost never that direction.
15:51
It's usually it's paying out less
15:52
Right.
15:53
than people actually need. So if the Boschian Commission was right that
15:58
the CPI was overstating inflation by 1.1 percentage points,
16:03
then reducing that overstatement means reducing Social Secures.
16:09
Which is a nice way of saying we re have to reduce.
16:15
The Social Security payments that people have grown accustomed to receiving.
16:20
So the Commission's own projections basically said the changes they recommended
16:24
would cut $148 billion in deficit spending and six hundred
16:31
and ninety-one billion dollars,
16:32
blah blah blah billion, off of the national debt by two thousand six.
16:36
Now that's real money. Those are real people's benefits.
16:41
So this measurement change that they came up with now has had
16:44
a direct physical consequence,
16:45
basically. Yeah.
16:46
And it still it still does, directly.
16:48
Like
16:48
it was not an abstract debate about how it was done.
16:53
And this was a commissioned study that concluded the government
16:57
was overpaying retirees because the inflation measurement was wrong.
17:01
And their conclusion led to policy changes that reduced the amount that retirees
17:07
got. Now some of those changes were reasonable.
17:10
Don't cut my head off here. But substitution bias is real.
17:15
You do change what you buy, right?
17:17
You don't buy if if you know ground beef goes up like it's been going
17:22
up lately to nine dollars a pound,
17:25
you're gonna switch to ground pork.
17:27
That's still currently sitting at about what beef was before Donald Trump
17:32
was elected. So maybe ~ I don't know,
17:35
~ inside the commission, go ahead.
17:36
But
17:38
sorry I was gonna say I mean these that sounds reasonable,
17:41
but then these numbers are just kinda like living in people's heads.
17:43
There's no way unless you can interview everybody at every checkout line
17:47
to figure out, you know, why are you buying pork?
17:48
Did you switch from from from beef to pork because of
17:52
The costs or health reasons or because,
17:54
you know, whatever. You you you left your Judais Judaism faith.
17:58
I mean whatever. ~
17:59
Right.
18:00
you know, like what what's going on here?
18:02
And we have to imagine that we can summarize that,
18:04
but it just seems like it's depending on a lot of stuff that's not really there's
18:07
no way to verify or refute, right?
18:10
It is. I
18:10
it's absolutely doing that. And it's not something that is truly data if
18:16
it r relies upon volunteers submitting information willingly.
18:20
Right? Like you might not actually think about the fact that you're switching
18:24
to pork, but when you're
18:25
Right.
18:25
sitting there looking at the price tag and you're going,
18:28
Why is it like eleven dollars more than it was three months ago for the same amount?
18:34
I'm gonna go to the one that's closer to the price because we we fixate
18:38
on on the actual amount that it costs.
18:40
Rather than
18:41
Hm.
18:43
the reasoning behind why we're doing it.
18:45
It happens so innately that we don't really think about it.
18:47
We're like, well, I mean it's it's meat,
18:49
it's right next to it. I'm not Jewish.
18:50
Like, you know, like I I'll substitute that.
18:54
Yeah. So even inside the commission there w they were kind of upset about this.
18:59
They was they were disagreeing about it.
19:01
Robert Gordon, who was the ~ just one of the members of this commission,
19:05
said that the bias estimate should have been higher,
19:08
not lower. Meaning maybe one point two to one point three percent,
19:13
not one point one. And then Dean Baker at the Economic Policy Institute,
19:18
he looked at the evidence and said it was largely speculative.
19:22
Guesswork rather than careful research,
19:23
and that the Commission had failed to make a compelling case that
19:26
the adjustments were justified.
19:29
So they did a study to justify policy outcome?
19:32
~ yeah, kinda. another reason is that they genuinely believed and and
19:38
I I do believe this, I think they believed that the consumer price index
19:41
was overestimating inflation. But they were very much less careful about
19:48
the evidence than they probably should have been.
19:50
They didn't use really it necessarily the scientific method.
19:53
But either way, the outcome was the same.
19:55
They changed the way that it was calculated in a way that conveniently reduced
20:01
What the government had to pay out.
20:03
And that change is now baked into how we measure inflation.
20:07
And that was nineteen ninety six,
20:09
that's almost thirty years ago.
20:10
And we're still living with the consequences of that choice.
20:15
So you've got the nineteen eighty three decision to use something that nobody pays
20:18
for, and then the nineteen ninety-six decision to adjust the methodology
20:23
to suggest that inflation is lower than people think it is.
20:26
Right. And that that was just then.
20:28
We'll get a little bit in into what's happened over the past,
20:32
you know, year and a half or so.
20:33
Two almost two. I don't hard to tell at this point.
20:37
Two deliberate choices, right?
20:38
One was building on the other.
20:40
Both with technical justifications,
20:43
both had the practical effect of making the official inflation number lower than
20:49
lived and experienced inflation.
20:51
But both of them were sitting too much.
20:54
Inside the structure where measurement sounds neutral and scientific,
20:59
like a tape measure. You know,
21:00
you you didn't say, Hey, go measure that symbol,
21:03
right, over there and and tell me how wide it is,
21:06
and you look at it and you go,
21:07
Well, it's eight inches. It that feels objective.
21:10
But when you have to measure it in millimeters and you tell me it's eight inches,
21:14
I can convert that. But if you need a whole number,
21:17
you know, you want to know how many inches it was,
21:19
it it doesn't really work out that way.
21:23
But the policy consequence is that people who were on a fixed income,
21:28
like retirees, but also people who are just working everyday jobs,
21:31
whose income is tied to inflation adjustments,
21:35
they just get less money.
21:37
So in December of twenty twelve,
21:40
the Federal Open Market Committee made another decision.
21:44
They officially adopted the personal consumption expenditure price index.
21:50
And look, the this is term heavy.
21:52
This is definitely a term heavy episode.
21:54
PCE is what they called it as their preferred measure for the
21:59
two percent inflation target, not CPI.
22:02
PCE. The one to
22:05
The one on one hears about on the news,
22:08
right? So the the word you actually hear about on the news is CPI,
22:14
PCE. ~ You have to figure it out.
22:18
So what's the the difference?
22:20
So the PCE and CPI basically measure the same thing,
22:23
right? Inflation. And that's what they're trying to do.
22:26
But they do it in different ways.
22:28
They they actually obtain the information and calculate it differently.
22:31
It's a different basket of goods,
22:34
different weightings, different calculations.
22:38
The Fed says that PCE is more comprehensive,
22:42
that it captures the actual pattern of what people spend money on more accurately.
22:47
And look.
22:49
There are reasonable technical arguments in that direction.
22:52
But what actually matters is that PCE is consistently lower than
22:58
the consumer price index, and not by a tiny amount.
23:01
By enough that we're at two percent of inflation sounds a lot different from we're
23:06
at two point five percent inflation.
23:08
So the Fed is targeting a different number than what people hear.
23:11
Yes, mostly, but they're targeting a different number than what people hear
23:16
in a way that changes the public debate about inflation and what it's anchored
23:22
on to the number that the Fed isn't actually using anymore.
23:26
So imagine if the Fed were keeping ~ the economy at two percent unemployment,
23:33
okay? And then they measured unemployment using a completely different calculation.
23:39
That only counted employed people who also worked overtime.
23:43
And then they just never explained that to anybody.
23:46
And then they made policy based on the second number while Congress
23:50
and the news talked about the first number.
23:52
That's what's happened.
23:54
And in that situation people would think they're insane or going insane because
23:58
the official number and their actual lives don't match up anymore.
24:02
Yeah, and that's a that's a lot of what happened at the ~ toward the
24:05
end of of Biden's term in the same kind of concept.
24:08
You know, they they kept telling us like,
24:10
no, everything's improving, the numbers are getting better,
24:12
everything's cheaper. And when we actually went to the grocery store,
24:15
when we actually went places to do things and get the very things that
24:19
we need to live and survive, it didn't really add up.
24:22
They're not going insane necessarily,
24:27
d just the numbers don't match up because they're they're literally measuring
24:30
different things.
24:32
So today, the the twelfth, the Bureau of Labor Statistics released the July CPI.
24:38
And the headline is three point four percent with the core at
24:43
two point five percent. But the Fed's looking at that price pricing consumer
24:47
equivalent, which probably came in lower.
24:51
But that's not gonna make a headline.
24:53
And that's not a detail at all.
24:56
That's kind of the whole reason the Fed decided not to move rates
24:59
on july twenty ninth.
25:01
And held rates at three point five to three point seven five percent.
25:05
And if memory serves that was a tight vote,
25:07
wasn't it?
25:08
Nine nine to three, I mean three members dissented.
25:11
They wanted higher rates. The dissent isn't usually that visible,
25:17
but it was this time. And I know you well enough to know that your next question
25:23
is going to be why? Because even within the Fed,
25:26
there's a lot of disagreement about whether that number,
25:29
right, the PCE number that they're actually looking at,
25:31
is actually telling them what they need to know about inflation right now.
25:36
Is inflation really cooling or are the metrics they've chosen just
25:41
not seeing something that's really happening?
25:43
And meanwhile the CPI number, the one everyone's talking about,
25:46
is showing shelter up three point four percent year over year,
25:50
and it drove nearly two third of two thirds of the monthly increase.
25:53
Exactly. It it drove two thirds.
25:55
So when people see three point four,
25:58
they might think, okay, inflation's spread around,
26:01
but it's not. It's concentrated in the one cost that none of us can actually escape.
26:07
And that concentration showing up in the number that the public's debating about
26:12
is not the number the Fed's using to make decisions.
26:15
So why does shelters stay that elevated if the housing market's cooled off?
26:19
Now we're gonna introduce another three letter acronym.
26:22
That's because the OER is lagging.
26:23
Okay. That's what we're missing.
26:24
So it's based on
26:27
right. O OER, of course. So it's based on survey data.
26:31
Yes, actual housing sales have cooled,
26:35
but the surveys are slow to catch up because rental surveys take time.
26:40
The data looks back. So you get this ghost of
26:45
of housing's past inflation.
26:48
kind of baked into the index even after the markets started to move.
26:52
And the Fed is looking at PCE,
26:54
which probably doesn't weight shelter as heavily.
26:58
So they see it cooling. The num the public sees the CPI headline and thinks it's
27:04
not cooling. And both are looking at their number and thinking that the other
27:08
one is crazy.
27:09
And then there's the actual problem of data collection breaking down.
27:12
Yeah. So in October of twenty twenty five,
27:16
the government shut down. Not metaphorically it shut down,
27:20
and the Bureau of Labor Statistics,
27:21
which produces the CPI, is a government agency.
27:25
Their staff were furloughed, they stopped collecting data,
27:29
and when they came back and tried to put it together,
27:33
the shelter component of the CPI or the housing,
27:36
maybe we should just call it housing,
27:37
but the housing component of the CPI for that period.
27:40
Had a massive data gap. There just wasn't any.
27:43
So they couldn't actually survey people.
27:45
They were not literally allowed to show up to work.
27:48
So they couldn't get new rental information.
27:50
So they made a decision. They carried forward the previous month's housing estimate.
27:57
And then they froze it in place,
27:59
which assumed a 0% change in housing inflation for that shutdown period.
28:06
So they just filled the hole in the data by keeping the number the same
28:10
for the previous month or previous ~ report.
28:13
Exactly. And that's not great.
28:15
So Jason
28:16
No.
28:17
Furman, who's at Harvard now, he actually used to chair the Council
28:21
on Economic Advisors under President Obama.
28:24
He looked at that and called it a big judgment error.
28:27
I mean, I would too. But he said the the carry forward methodology probably
28:33
understated housing inflation by point three to six percentage points year over year
28:39
during that period of time. That's not trivial.
28:42
Because housing is a third of the consumer price index.
28:45
So if if shelter if shelter or housing is undercounted by a half
28:49
of a percentage point, that spreads through the whole index.
28:53
Which ~ breaks the measurement system itself.
28:55
It's broke. And kind of more than that.
28:58
When the government shuts down,
29:00
you get this weird waterfall where the data stops,
29:04
the analysis stops, and then you've got to fill in the gaps with assumptions.
29:08
And those assumptions are baked into the official number that people
29:12
see and that the Fed is supposed to be using.
29:15
Except the Fed is using the PCE,
29:18
which has its own separate calculation.
29:20
So
29:22
Who knows whether their number got affected the same way or not?
29:27
This is insane.
29:29
It is. It's a measurement system that's pretty much already laggy,
29:34
right? Like it's already using hypothetical numbers instead of the ones that we're
29:37
seeing right now, because that's just how data works.
29:39
It has to be collected. So now it's also vulnerable
29:43
to government shutdowns literally breaking the pipeline of information.
29:47
It's not like, you know, it it's just a log that pushes into
29:50
a database somewhere and and when people aren't at work it just keeps pushing.
29:55
It it just breaks and there's just no information.
29:57
And the only reason people even know about this is because Furman actually published
30:02
a note about it. It's not in the official CPI release,
30:05
it's not flagged, there's no blaring alarm.
30:08
You just have to go digging to find out the the consumer price index you're looking
30:12
at has a little star next to it saying that the housing component
30:16
was estimated because the government didn't exist during that period of time.
30:20
So let's talk about what we need to know at this point.
30:24
what I want to know is you go to the grocery store,
30:29
you know what you spent last summer,
30:31
you know what you spent last month,
30:33
and the government tells you food inflation is two point seven percent year over
30:36
year.
30:37
And you know that that's not what you're actually paying for at the register.
30:41
Right, I know it. Everyone knows it.
30:43
So where is the two point seven percent coming from?
30:45
Coming from a different calculator,
30:47
a different sample, a different basket.
30:49
It's it's food at home inflation specifically,
30:53
which the Bureau of Labor Statistics measures using a specific approach.
30:58
But researchers have looked at this.
31:00
They've asked consumers how much they think grocery prices have gone up.
31:05
Now, Pew Research found that the median consumer thinks grocery inflation
31:11
is somewhere between 3.9%.
31:14
and five point four percent, not two point seven.
31:17
And that gap is consistent in perpet perpetuity for all of time.
31:23
It keeps showing up. People think inflation is higher than the actual number says
31:28
it is.
31:29
And that's a two to three percent percentage point gap.
31:32
On the low end of what people report.
31:34
And here's the thing about that number.
31:35
It's not that people are bad at math.
31:38
A lot of people are. It's that the official number is using
31:42
a statistics approach that doesn't actually match how people actually shop.
31:47
The CPI uses a fixed basket of items.
31:50
Your spending patterns change,
31:53
right? Like you stop buying the expensive thing,
31:55
you buy the store brand instead,
31:56
you buy less. The index, say butter went up 20%,
32:00
but you switch to a different
32:02
product that only went up ten percent.
32:04
So the index says your cost went up less than it actually did.
32:08
Your lived experience is you're paying more for less like actual item,
32:14
but the measurement smooths out over the substitution effect.
32:19
The metric is built to absorb your adaptation.
32:22
Right. And then on top of that,
32:24
the BLS measures food at home completely separate as from food away from home.
32:29
So if you're eating at a restaurant or a takeout,
32:32
that's in a completely different bucket,
32:34
completely different category.
32:35
When you're actually budgeting,
32:37
you're thinking about feeding yourself.
32:40
Like that's it. You're like food in my belle.
32:42
The index is splitting three ways though.
32:46
And the result is that housing
32:48
which is thirty five percent of that,
32:49
is measured with a phantom rent number no one actually pays.
32:52
And food, which is actually hitting people the hardest,
32:56
is measured with a calculation that assumes that you never change your consumption
33:01
pattern and you never eat out.
33:03
official grocery number since twenty fifteen,
33:05
and think about that time window,
33:07
that's when smartphones became,
33:08
you know, necessary and when housing got really expensive in most cities,
33:13
when everything kind of tightened up,
33:15
grocery prices are up thirty six point nine percent since twenty fifteen.
33:21
Since twenty twenty, they're up twenty five point two percent.
33:26
That's right at that inflation time,
33:28
that pandemic time, and the official CPI food number is two point seven percent.
33:33
That disconnect is not small. That's not like a measurement error within
33:37
a reasonable window. That is a structural error.
33:41
And the person who goes to the store every week is experiencing
33:43
the twenty five percent and not experiencing the two point seven percent.
33:47
No, they're not. And that's not hypothetical.
33:49
Like there's a federal employee named Chris Myers in Kansas City.
33:53
He's a federal employee that used to co own crane brewing.
33:58
During the October shutdown, he lost his paycheck,
34:01
no income. His family was already on a tight budget,
34:04
but once that shutdown hit, his wife told the Missouri Independent that their
34:09
grocery budget nearly doubled.
34:11
They went from spending between two hundred and three hundred dollars every
34:15
two weeks on groceries.
34:16
To four to five hundred dollars every two weeks.
34:19
That's not the CPI number. That's what actually happened when
34:23
an actual household with actual income got disrupted and they had
34:27
to feed their actual children.
34:29
When the government shut down.
34:30
Yeah, th the government shut down and the same shutdown broke that data that
34:35
we had for housing, so the measurement system was literally broken at
34:40
the the one time when real families were experiencing real cost increases.
34:44
There's also a woman named Megan Overfeldt.
34:47
She's a data entry worker in her thirties and lives in Raytown,
34:50
Missouri. She has four kids. She grew up in Johnson County,
34:54
Kansas, and her childhood home now sells for three hundred and seventy five thousand
34:59
dollars.
35:00
She cannot afford to buy in the neighborhood she grew up in.
35:02
She has a job, she's an employed adult,
35:05
and the neighborhood of her childhood is priced well beyond her reach.
35:10
Despite the official numbers saying housing inflation is easy.
35:13
Right. And here's the thing the reason sh shelter,
35:16
housing in the CPI is so low relative to what people are actually experiencing
35:22
is that it's measured with owner's equivalent rent,
35:24
the OER. It's asking people what they think they would pay to rent their
35:29
own house to themselves. But what Megan Overfeld is actually confronting
35:33
is sh can she afford to buy a house?
35:36
Can she afford the down payment,
35:38
the mortgage, the property taxes?
35:40
Those are real costs.
35:43
Paul Donovan at UBS Global Wealth Management looked at the CPI and said
35:47
it pretty flat out. He said a quarter of the CPI basket is a complete fantasy.
35:52
Owner's equivalent rent is a price that no one actually pays.
35:56
And he calculated that by using the OER instead of actual housing costs,
36:01
the Federal Reserve has systematically understated inflation by about 0.3% points
36:08
per year from twenty nineteen to twenty twenty five.
36:11
So the measurement's not just lagging,
36:13
it's wrong by design.
36:14
And if you're Megan trying to figure out why you can't afford your
36:17
own childhood neighborhood, the official CPI number is telling
36:20
you that housing inflation i is easing.
36:22
But it isn't just wrong, it's insulting.
36:25
It's telling you that your experience doesn't match the information,
36:28
but the information isn't measuring your actual experience.
36:32
It's measuring a phantom rent that literally no one pays.
36:36
And when you're Chris Myers watching your wife's grocery dum budget double
36:39
in a month because the government shut down and disrupted your paycheck,
36:42
the CPI saying food inflation is two point seven percent isn't informative,
36:46
it's noise.
36:48
It is noise. And that noise is what's driving our current policy.
36:53
The Federal Reserve is looking at their PCE number,
36:56
the public's looking at the CPI,
36:58
Chris and Megan are looking at their bills.
37:01
None of those numbers are actually talking to one another and they're
37:04
all pulled from different sources.
37:07
And here's what that means. There's a pattern that goes back all the way to 1983,
37:12
so long ago. The official measurement of inflation lags the lived cost,
37:17
not by accident, by by design.
37:19
When the BLS switched to owner's equivalent rent,
37:23
the OER, they were making a deliberate choice to use a hypothetical number instead
37:27
of an actual cost. When the the Boskin Commission adjusted that calculation in 1996,
37:33
they were making a deliberate choice.
37:35
To conclude that inflation was lower than previous calculations suggested,
37:39
with the direct policy consequence of reducing Social Security.
37:43
And then when the Fed switched to PCE in twenty twelve,
37:47
they were making a deliberate choice to look at a different signal than
37:50
the one the public hears. All three choices have technical justifications,
37:56
but all three choices have consequences for real people.
37:59
The consequence being that the policy is built on a number that doesn't match
38:02
reality.
38:04
Right. And here's why that's a problem beyond just,
38:07
you know, the numbers wrong. If the Fed really believes that inflation
38:11
is slowing down because they're looking at PCE,
38:15
and inflation actually is running hotter than that because the real economy
38:19
is more expensive than that can really capture,
38:22
then they're gonna keep rates lower than the economic reality requires.
38:27
They're gonna keep rates lower which
38:31
makes borrowing cheaper, which makes more people demand things,
38:34
which makes prices go higher, which makes inflation hotter,
38:37
which is the opposite of what the policy goal actually is.
38:41
So they're they're responding to the wrong signal.
38:43
It might be. Or the signal's responding to them.
38:46
If inflation stays high because the Fed's policy's off,
38:50
then the Fed's going to point to that and say,
38:53
see, inflation is sticky. And then they're going to rethink.
38:56
But in the meantime, what's happening to the person actually paying for things?
39:00
They're just paying.
39:01
Their paycheck isn't going up,
39:03
their rent, their mortgage, their groceries,
39:05
all of those things are actually going up in real time.
39:08
And when the official number says inflation is slowing down,
39:11
and their lived experience says everything's getting more expensive,
39:14
there's a gap between the official world and the real world.
39:17
That gap makes us untrustful.
39:20
It it it breaks trust. It it erodes the credibility of
39:25
the institution that's supposed to be managing all of this.
39:28
Our government.
39:29
Or it's private bank the Fed. And more importantly,
39:33
it means that the people making the decisions aren't actually connected
39:37
to what those decisions cost the taxpayers.
39:40
Which is important because the Fed has enormous power.
39:43
Yes, they set the rates. Rates flow through the entire financial system,
39:48
our entire economy is basically built on them.
39:50
Every decision about money, borrowing,
39:53
saving, investing, hiring, it all depends upon what the Fed decides.
39:58
And they're deciding based on a metric that doesn't match the real lived inflation
40:03
because of deliberate choices made in nineteen eighty three.
40:06
Then they tweaked it in nineteen ninety six and then tweaked it again
40:11
in twenty twelve.
40:12
None of which anyone has asked the average taxpayer about,
40:16
none of which were put to a democratic vote,
40:19
and all of which are now embedded in how we measure the economy that when
40:25
you challenge them it sounds like you're being weird instead of paying attention.
40:29
Of course even inside the Fed there's doubt about whether
40:31
the measurement's working accurately or not.
40:34
There is. Kevin Walsh, who's the current Fed chair,
40:37
actually testified to the Senate Banking Committee in July about exactly this thing.
40:41
He said the Fed has established a task force to evaluate new data sources
40:46
and consider methodological changes.
40:48
And when he was asked, he asked them directly how how do we ensure that policymakers
40:53
are receiving accurate, relevant,
40:55
contemporaneous, actionable data?
40:58
That's literally the Fed chair asking the Senate.
41:01
Whether the data that he is using is any good.
41:04
He's not confident. He's not saying the system is working.
41:07
He's asking the Senate how to fix this.
41:10
So we're at the point where even the Fed doesn't trust the data?
41:13
Exactly. They're actually asking for a task force to figure out where there's better
41:17
information. That means the entire money money policy apparatus is running
41:22
on a measurement system that the people running it admit might
41:26
not actually be working. And that's not trivial.
41:30
That's the equivalent of an airline saying the the instruments
41:33
on your airplane might not be accurate,
41:35
but we're gonna fly anyway.
41:36
Huh. ~ and the gap between this official number and the real number
41:41
is only giving you feel more obvious with the higher inflation stays,
41:45
right?
41:46
Yeah.
41:46
Right now people are frustrated.
41:48
I I would say more than that. They they feel that gap every day.
41:52
But if inflation stays high or it gets worse,
41:55
then that gap is gonna be undeniable.
41:57
The Fed's gonna be pointing their PCE numbers and saying inflation's under control
42:02
and people are gonna be paying their bills and knowing that that's just not true.
42:05
And the institutions are gonna lose credibility,
42:08
not because they're corrupt, mm they are,
42:11
but because they're literally just not measuring the same world that people
42:14
are living in.
42:15
So here's what's I guess the wildest part of this whole story.
42:19
It's the thing that holds the whole thing up.
42:22
It's that the government and the government's private central bank
42:27
are measuring inflation with formulas instead of experience.
42:31
They're not measuring what a house costs,
42:33
but what you'd charge yourself to rent your own house,
42:36
not measuring what people actually bought yesterday,
42:39
but what would they buy if prices didn't change?
42:43
It's mathematically defensible,
42:45
but completely disconnected from how any of us actually budget.
42:49
And the person making decisions off of these numbers is either looking
42:52
at a different number still, or they're looking at the same number,
42:55
but it's running six months behind what's actually happening in the world.
42:58
Right, so pay attention to this.
43:00
Pay attention to the gap. Don't just look at the CPI headline,
43:04
look at the cost of housing, look how fast it's moving.
43:07
Look at what the Fed is actually targeting,
43:09
look at the PCE numbers because those two numbers are moving apart right now.
43:13
They're moving apart because one of them is real and one of them is theoretical.
43:18
And the policy's built on the theoretical.
43:23
So one concrete thing people can actually do next time there's a CPI report
43:27
is to look at the shelter component.
43:28
And not just read the headline,
43:30
listen to what the news is saying about it,
43:31
but actually look at whether it's accelerating or decelerating.
43:34
Because the shelter keeps running hot and the official story
43:37
is that inflation's easing, you're seeing the lie in real time.
43:41
And you should ask yourself why we're measuring the thing you pay for with
43:45
a number and nobody actually pays.
43:47
That one question reveals the entire logic of why the system works the way it does.
43:52
We measure inflation with formulas because formulas are stable.
43:55
Formulas don't change with politics or what president is in the Oval Office.
44:00
And it sounds like science. If the formula doesn't match your life,
44:05
well maybe your life is wrong.
44:07
But that's not how it works. That's not
44:10
How they want you to think it works at least.
44:12
So listeners as you know the Overlap is a show about systems of power,
44:16
labor, and American injustice.
44:18
You can find us at the FOF.foundation,
44:21
and you can follow us on Blue Sky or Mastodon.
44:25
Yeah, also don't forget to share interesting posts with your friends and family.
44:28
Shoot us an email at the overlap.
44:30
The overlap at FOF.foundation.
44:33
And make sure you give us a five star rating on the podcast
44:36
app you're currently listening to,
44:38
like Apple, Spotify, Podveen, whatever.
44:40
It helps us reach more engaged listeners like you.
44:43
The more you know. Bye.
44:44
And with that, bye.