Wednesday, March 29, 2023

More on the sharp deceleration in YoY house price gains, and the Fed’s chasing the phantom menace


 - by New Deal democrat

Since there is no big economic news again today, let me fill in a little more detail on house prices through January, reported yesterday, vs. CPI for shelter.

Here is the monthly % change for the past 18 months for Owners Equivalent Rent in the CPI (blue), vs. the Case Shiller national index (gold) and the FHFA purchase only index (red) (note: both house price indexes /2.5 for scale):

Month over month the Case Shiller index declined -0.2% on a seasonally adjusted basis, while as I noted yesterday the FHFA index increased 0.2%.

But the most important detail is comparing the early 2022 changes with the last 6 months. Owners Equivalent Rent has increased between 0.6% and 0.8% monthly ever since last May. By contrast, both house price indexes started declining sharply m/m beginning last June. In other words, there are still two more months (March and April) where Owners Equivalent Rent will be compared with values below 0.5% in the same months from 2022, meaning that YoY OER is likely to continue to increase at least slightly for several more months.

Meanwhile, as the YoY% graph including the Case Shiller and FHFA indexes indicate, YoY price increases have continued to decelerate sharply, down to +3.8% and +5.3% respectively as of January:

which (after /2.5 for scale) suggest that OER will be well contained by next winter.

As I wrote several weeks ago, CPI less shelter is only up +0.7% in the 8 months since last June, i.e., at only a 1.0% YoY rate:

In making its case for continued rate hikes, the Fed has ignored this and been hanging its hat on services inflation in the broader measure of. personal consumption expenditures, which will be released on Friday.

Tuesday, March 28, 2023

YoY house price gains continue to decline


 - by New Deal democrat

Today is a travel day so I have to keep this brief. 

On a monthly basis for January, prices rose 0.2% as measured by the FHFA house price index. But because that was far less of an increase in January last year, YoY house prices as measured by the FHFA index declined to +5.3%. This implies that by January next year OER as measured in the CPI will inly be up about 2.1% - well within the Fed’s comfort zone:

Unfortunately we still have at least several months to go before OER starts any kind of meaningful decline. Still, this is further evidence that the Fedcontinues to chase a phantom menace.

Monday, March 27, 2023

3 graphic signs of financial stress


 - by New Deal democrat

The theme of my weekly “high frequency” economic indicators update over the weekend was the sudden deterioration in some measurements of financial stress.

Tomorrow we’ll find out that house prices as measured by both the FHFA and Case Shiller have decline further, and that increases are substantially lower than as measured by the CPI, and on Friday we’ll find out what two of the NBER’s important measurements: real personal income and spending, as well as real manufacturing and trade sales, are, but since today there’s no big news, let’s take a look at those financial stress indicators I mentioned above.

First, the Leverage subindex of the Chicago Fed’s Financial Conditions Index got bigly revised last week (from gold to red in the graph below), to show that leverage is now more restrictive than at any times not shortly before or during recessions (compared with the YoY change in the Fed funds rate, blue, for comparison):

This tells us that credit has actually been pretty tight for the last year, and especially the past few months.

Second, the St. Louis Fed’s Financial Stress index, which had been below zero, i.e., un-stressful as late as one week prior, suddenly shot up to levels not seen outside the last several recessions (see sliver at far right), except for the Long Term Capital Management crisis of 1998:

Third, in the past two weeks 2.3% of all deposits have been withdrawn from smaller commercial banks:

The only other time except for the past week that deposits YoY in commercial banks have been negative was in 1985-86:

If you have any significant money on deposit, whether in savings, checking, or money market accounts, you would do well to find out what the highest interest rate a bank in your area is paying for new money, and then march into your current bank and demand that they match that rate, or you will pull your money out. Especially if your bank has been piggish about continuing to pay almost non-existent interest, chances are very good you will get what you want.

It’s getting harder and harder to find any signs outside of employment that are not flashing warning signs of recession in the immediate future, if not already here.

Saturday, March 25, 2023

Weekly Indicators for March 20 - 24 at Seeking Alpha


 - by New Deal democrat

I’ve neglected to put this up for the past several weeks, but by now you know where to find my latest Weekly Indicator post at Seeking Alpha.

Probably unsurprisingly, in the week after the Silicon Valley Bank failure, just about every financial stress indicators suddenly spiked. In other words, credit conditions, which had already tightened by the end of last year, tightened a lot more in the past several weeks.

Like I wrote yesterday, there are only a couple of things still holding up the economy from falling into recession. As usual, clicking over and reading will bring you up to the moment, and reward me a little bit for putting in the effort.

Friday, March 24, 2023

There is now only one significant manufacturing datapoint that is not flat or down - but it’s the one the NBER relies upon


 - by New Deal democrat

I am increasingly of the opinion that at the moment, the only two economic data series that are important are nonfarm payrolls and the personal consumption expenditure deflator. That’s because almost every other important metric of the economy is either flat or declining. But payrolls keep chugging along (as evidenced by yesterday’s initial claims report showing that layoffs are figuratively non-existent). And the PCE deflator, which covers a broader spectrum than the CPI, keeps helping two coincident indicators important to the NBER, namely real personal income and real manufacturing and trade sales, remain in the plus column. 

This morning’s report on manufacturers’ new orders for durable goods for February is evidence of that. The broad measure (blue in the graphs below) declined just shy of 1%, while the core measure (red), which is less noisy, increased by 0.2%:

Both are below their peaks in December and August 2022, respectively. In the past few months the broad measure has been trending down, while the core measure has been basically flat.

New orders for durable goods have long been recognized as a leading indicator. Here’s the longer term view for the past 25 years:

Their record certainly isn’t perfect. The core measure continued to rise well into the Great Recession, and both declined sharply in the industrial recession of 2015-16 (that was not an actual recession because consumers kept spending merrily away, and so employment kept rising as well).

Anyway, in the below graph I’ve also added the value of manufacturers total actual shipments, and shipments for “core” capital goods, as well as *nominal* manufacturers’ sales, all normed to 100 as of October 2022:

The slowdown in growth, followed by an actual downturn in the broad measures of orders and shipments, is apparent, as is the flattening in both “core” measures, up only 0.1% and 0.2% since October, respectively.

Nominally, manufacturers sales (gold) through January are also down -0.8% since October. This is where the PCE deflator comes in. Because while there is no breakout of “real” manufacturers sales only, real manufacturing and trade sales (which also includes wholesale and retail sales, and is relied upon by the NBER) was up 0.6% as of its last reading in December.

In other words, the entire panoply of goods production and distribution in the US economy (including industrial production as well) is either flat or down - with the exception of those two measures (real personal income and real manufacturing and trade sales) which take into account the big deflation in producer prices since June, and the PCE deflator. More on that next week, as we wait for the February PCE report next Friday.

Thursday, March 23, 2023

New home sales for February increase; likely bottomed last July


 - by New Deal democrat

Most of what you probably read elsewhere focuses on new home prices, which after finally declining -0.7% YoY in January, rebounded to +2.5% YoY. As is usual, prices  follow sales YoY with a considerable lag (note since prices are not seasonally adjusted, this is the right way to make the comparison):

In fact if you’ve been reading me and following my rule of thumb, the peak occurred  months ago, once the YoY gains had decelerated by over 50%.

But the most important news was actually in the seasonally adjusted sales, which at 640,000 annualized increased 7,000 from a seriously downwardly revised (by -37,000) January. Big deal, you say? Here’s a graph of the last several years:

While revisions can still be made to the last several months, it is apparent that the bottom for new home sales was last July, at 543,000 annualized. There has been an almost consistent monthly increase since.

This joins existing home sales, which likely bottomed in December; and housing permits and the three month average of starts, both of which possibly bottomed in January. As I’ve written many times before, while new home sales are very noisy and heavily revised, they are frequently the first housing data to turn. And it appears they have. 

Nope; nobody is still getting laid off


 - by New Deal democrat

Initial jobless claims declined -1,000 to 191,000 last week, while the more important 4 week moving average declined 250 to 196,250. Continuing claims, with a one week delay, rose 14,000 to 1.694 million:

All of these remain excellent numbers. In particular, the higher numbers at the left end of the graph would have been considered excellent at any previous time in the past 40 years. So the paradigm that almost nobody is getting laid off remains intact.

The YoY comparisons are against the best numbers of last year, so they look comparatively bad. Weekly claims are up 15.1% YoY and continuing claims are up 9.8%. The more important 4 week average is up 8.6%, still below the 10% threshold for even a yellow flag, and bear in mind that it is only important if it lasts a month or more at that level:

This suggests that the unemployment rate in the March payrolls report will be unchanged or close thereto, and at very least there will not be a “bad” headline jobs number.

Wednesday, March 22, 2023

Updating 3 high frequency indictors: no recession yet, but no paucity of yellow flags

- by New Deal democrat

Aside from the Fed’s rate decision which will be announced this afternoon, it’s a slow economic news week. In general, the punditry which I read seems to be settling on a consensus that we are going to manage to have a soft landing. With the exception of jobs and payrolls, the rest of the indicators I track in sequence continue to indicate a recession is near. Let me update three high frequency indicators I’ve been paying particular attention to.

1.  Redbook consumer spending

This is a weekly update of same store spending, measured nominally YoY. The trend here is pretty self-explanatory:

YoY consumer spending was holding up in double-digits until the middle of last summer. Since then the trend, albeit with some waxing and waning, has been pretty consistent. The average of the last 3 weeks has been just below 3% YoY.

For comparison, here is monthly nominal retail sales YoY since last March:

The trend is similar, but the decline in Redbook has been considerably more pronounced. If the monthly series follows, March nominal retail sales will decline further YoY. And as indicated that’s before consumer inflation is taken into account, which as of February was 6.0% YoY.

Further, if the trend continues, even nominally Redbook will be negative YoY by midyear.

2. Temporary employment

Temporary employment is a leading sector of the jobs market. The American Staffing Association has been posting a “Staffing Index” since 2006. Typically the Index slowly increases during the year, with major seasonal fluctuations around the 4th of July, Thanksgiving, and Christmas-New Year’s. Here’s what it looks like since January 2022, and the onset of the Great Recession, 2006-07, for comparison:

The 6% YoY downturn in February through early March this year has been the biggest since the series was begun. That being said, there was a similar downturn in late 2015 (not shown) without the economy coming close to recession.

For comparison, note that there has been a similar YoY downturn in termporary employment in the official payrolls report:

The last few weeks suggest this downturn in the monthly jobs report will continue.

3. Payroll tax withholding

This is a decent coincident proxy for the total jobs market. Almost everybody pays payroll taxes, and it stands to reason if wages and/or jobs growth stagnate, so will the taxes from those paychecks.

Matt Trivisonno of the Daily Jobs Update keeps track of these graphically, and makes a free graph available with a 90 day delay. Which means that the below graph includes the period up through roughly December 15. By way of further explication, the comparison is taxes paid during the entire previous 365 day period, vs. the entire 365 day period before that:

YoY payroll taxes peaked at about 22% in March 2022. Remember that my rule of thumb for non-seasonal adjusted data is that it probably has peaked if the YoY comparison has declined by more than 50% within the ensuing 12 months.

As of December 15, this had declined to about 8.5% - i.e., more than half, suggesting that, if we could seasonally adjust, we would find that payroll taxes paid had turned negative.

Because the data is public at the Department of the Treasury’s site, I can further report to you that as of March 20, the entire previous 365 day period resulted in 5.9% more payroll taxes paid than the 365 day period between March 20, 2021 and March 20, 2022. This is almost a 75% YoY decline.

But the data is a little more nuanced. During the 1st fiscal Quarter of 2022-23, payroll taxes paid were only 1.2% higher than Q1 of 2021-22. So far in the fiscal 2nd quarter this year, taxes are up 7.1% compared with Q2 of 2022 through March 20. That’s a pretty strong rebound.

And the rebound accords with information provided by California’s Treasury Department, shown below:

After a steep YoY decline in late 2022, there has been no further YoY decline in 2023 so far. Since California includes about 1/8th of the entire US population, and an even bigger share of the economy, this is good information.

Interestingly, the Treasurer’s Office for California indicated that they believed the big shortfall in 2022 was due to the downturn in the stock market, which meant that stock options tied to an increase in share prices could not be cashed. The stock market recovered pretty nicely between November and February, so likely some of those stock options were now in the money and could be cashed.

Probably the closest monthly analog is aggregate payrolls in the jobs report, shown YoY below:

Again, there is deceleration, but no nominal downturn yet.

Put the three data series together, we see that two short leading indicators, temporary help and consumer spending adjusted for inflation (since consumption leads employment) have turned down, but no coincident downturn in overall employment. In short, no recession yet, but no paucity of yellow flags.

Tuesday, March 21, 2023

February existing home sales confirm prices have declined, but bottom in sales and construction may be in


 - by New Deal democrat

There were only two noteworthy takeaways from the February existing home sales report:

(1) like mortgage applications, permits, and starts, existing home sales responded to lower mortgage rates (a decline from just over 7% to just above 6% between last October and January):

(2) As usual, price changes lag sales; for the first time since the pandemic, the median house price actually declined -0.2% YoY from $363,700 to $363,000 (remember: this data is not seasonally adjusted):

This simply confirms the data we have gotten from the more important new home construction data. I do think there is some good news here, in that we may very well have seen the bottom in this metric as well as in permits, starts, and mortgage applications. This does not mean a recession is not going to happen; but it does suggest it will not be prolonged and may not be very deep.

Monday, March 20, 2023

Average and aggregate nonsupervisory wages for February


 - by New Deal democrat

There’s no significant economic news today, so let’s update a couple of income indicators important to average American working households. Namely, because we now have the inflation report for February as well as payrolls, we can update average and aggregate nonsupervisory wages.

Average hourly earnings for nonsupervisory employees increased 0.5% on a nominal basis in February, tied for the strongest reading since last June. But since consumer prices increased 0.4%, real average hourly wages only increased 0.1%:

The good news, as indicated above, is that this is tied for the highest reading since last April (as I’ve noted many times, a $2 decline in gas prices can do wonders for economic statistics). The not so good news is that the above graph is normed to 100 as of January 1973, the record high water mark for nonsupervisory wages prior to the pandemic. Which means that we remain below that level, as we have been for almost a year.

Second, aggregate real nonsupervisory payrolls are an excellent way of viewing the health of the American middle/working class as a whole. Nominal aggregate wages were unchanged in February, but in real terms declined -0.3% in February from January’s record high:

Typically real aggregate payroll growth slows down sharply in advance of recessions, and usually stalls out during recessions. In fact, YoY negative growth is a very good “fundamentals” mark of recession, because when average American households have less money to spend in the aggregate, they cut back. And a cutback in consumption leads to a cutback in jobs.

And the YoY trend in real aggregate payrolls, while not negative, has declerated sharply in the past year, and is currently at 1.4%:

In the below long term graph, I subtract 1.4% from YoY growth so that it shows at the zero line:

As you can see, this level is consistent with a sharp slowdown (e.g., 1967, 1994, 2016) as well as an oncoming recession. *If* consumer inflation continues to ebb, then to indicate a recession, aggregate payrolls will have to decelerate faster than they have so far.

Friday, March 17, 2023

Industrial production ‘meh’ in February, but down sharply since last summer; real manufacturing and trade sales forecast to decline in Febuary


 - by New Deal democrat

Industrial production was unchanged for the month of February, while manufacturing production rose +0.1%. But the bad news is that both were revised lower for the past 5 months, as shown on the two graphs below:

As a result, industrial production (blue below) is now -1.8% below its September peak, while manufacturing production (red) is -2.0% below its peak from last April:

With the exception of 1966, before 1990 such declines would always have been recessionary. Since then, because manufacturing has shrunk so much as a percentage of the overall economy, both in 2016 and 2019 there were bigger declines without there being a recession. Still, this is one of the 4 main coincident indicators relied on by the NBER in determining if the economy is in recession.

Industrial production is also the missing component I needed to make the first, preliminary estimate of real manufacturing and trade sales for February. 

Recall that we won’t even get the “official” measure for January until the deflators for personal income and spending are reported on the 31st. But we already have real retail sales for February, so what is missing are manufacturing and wholesalers sales for that month, minus the deflator. Industrial production fills in the manufacturing component, with the exception that we don’t know the relative inventory change vs. sales for that month.

Without further ado, here is what the average of industrial production + real retail sales look like for the past 30 years compared with real manufacturing and trade sales:

Both the trend and the typical monthly change are reasonably close.

Now here is the percentage change for the last 22 months:

This method is not so accurate as the 2nd estimate I discussed several days ago, but does give us the main thrust. Like the 2nd estimate, for January it forecasts a sharp increase (+1.5% vs. the +0.8% of the 2nd estimate), followed by a -0.4% decrease in February. Like the 2nd estimate, it indicates a new record high for January.

As I wrote the other day, we’ll see how this forecast plays out on the 31st for January, and at the end of April for February. 

Thursday, March 16, 2023

Housing construction: good news and bad news


 - by New Deal democrat

This morning’s report on housing construction contained both good news and bad news.

First, the good news. Both permits (gold in the graph below) and starts (blue) increased, the former by 185,000 on an annualized rate, the latter by 129,000:

It is very possible that January’s rate of 1.339 million permits annualized and 1.321 starts will be the low for this cycle. That’s because mortgage interest rates (red, inverted), which along with Treasury yields frequently peak before the Fed finishes hiking interest rates, may very well have done so for this cycle at 7.08% in late October and early November. They declined to 6.09% by early February. As is usual, because permits and starts lag interest rates, the decline in mortgage rates showed up in the increase in permits and starts in this report.

As I have noted many times before, single family permits are the least volatile and most leading of the housing construction data, and these also rose by 55,000 to 777,000 annualized:

So much for the good news. The first bad news is that the decline which has already taken place is still consistent with an oncoming recession.

The second, more important piece of bad news is that housing under construction (red in the graph below) was revised lower for December and January, and declined further in February. It is now -1.2% off from its peak:

Since housing under construction is the “real” economic activity, this means that housing is finally putting some downward pressure on the economy as a whole. 

It isn’t that significant yet. Typically housing under construction has called more than 10% before a recession has begun. But this month’s report is confirmation that it has begun. Among other things, expect employment in residential construction, which was still increasing albeit by a very small 1,200 jobs in February, to begin to decline in the next few months.

Jobless claims: nobody is (still!) getting laid off


 - by New Deal democrat

Initial jobless claims declined -20,000 this week, back below 200,000 to 192,000. The 4 week average declined -750 to 196,500. Continuing claims, delayed one week, declined -29,000 to 1.684 million:

For all intents and purposes, it is still the case that “nobody” is getting laid off.

As the above graph shows, we are now almost one year past the lowest level of new jobless claims in history. Needless to say, this affects the YoY comparisons, which are now higher:

On a weekly basis, new jobless claims are 8.5% higher than one year ago, and continuing claims are 5.6% higher. The much more important 4 week average of new claims is 4.1% higher.

None of this is anywhere near signaling a recession warning. I would need to see the 4 week average at very least 10% higher, and lasting for longer than a month at such levels to even raise a yellow flag.

Finally, to pick up further on jobs vs. retail sales, which were reported yesterday, a corollary to the observation that consumption leads jobs is that retail sales tend to grow faster than jobs earlier in expansions, but grow slower than jobs late in expansions. The below graph subtracts the rate of jobs growth from the rate of retail sales growth to show that:

When the line is rising, sales are growing relatively faster than jobs. When the line is declining, jobs are growing faster than sales. The “zero” line in the graph is the rate at roughly the midpoint of the last 3 expansions. 

There was a huge shortfall in jobs growth compared with sales growth due to the pandemic. There has since been huge jobs growth to close that gap in the long-term trend. It is still about 4.4% from closing, historically still very wide, but declining fast. Remember that the gap can be closed by a decline in sales, an increase in jobs, or both. 

Wednesday, March 15, 2023

Forecast: real manufacturing and trade sales are likely to set a new record for January


 - by New Deal democrat

One of the four monthly series of coincident indicators most relied upon by the NBER in determining whether the economy is in expansion or recession is Real Manufacturing and Trade Sales. A significant problem with it is that reporting of the data seriously lags. For example, the result for January will only be reported more than two weeks from now on March 31, because the series relies upon the PCE deflator, which will only be reported then.

Fortunately, I have been able to decipher two methods to make earlier estimates of the series, one with less than a one month delay (which isn’t available yet for February) and I will post on separately when the relevant data comes in, and one that relies upon total business sales, which was reported this morning, to make a more reliable estimate for January.

First, let’s take a brief look at total business sales and inventories, unadjusted for inflation. Sales for January increased 1.5%, while inventories declined -0.1%:

Note that, unadjusted for inflation, sales have failed to make a new high since last June, while inventories appear to be just peaking.

A longer term view shows that this has historically been true: sales lead inventories, both at peaks and troughs:

While there have certainly been more farsighted producers, in the aggregate it appears that it is only a prolonged downturn in sales which leads to a cutback in inventories, presumably by cutting production. Hence one reason why a recession occurs.

The current data on sales and inventories, then, is consistent with an economy on the cusp of a manufacturing recession.

But now to my main point: we can make a good estimate of what real, inflation-adjusted manufacturing and trade sales will show for the month of January by using today’s unadjusted total business sales, and then deflating it by equally weighted measures of PPI for commodities, for intermediate goods, for final goods, and CPI. Because this method is slightly more volatile than the “real” method, a dampening measure is employed in the below graphs.

The below graph shows the last 10+ years of real manufacturing and trade sales (blue) vs. the estimate using total business sales deflated by PPI and CPI placeholders (red):

While it isn’t a perfect fit, the trend, including the monthly direction, is almost perfect.

Here’s what the monthly percent changes for each are for the past 21 months:

With only 2 exceptions, the direction is the same; and most often the monthly change in the “real” measures is no more than 0.2% different than the estimate.

For January 2023, the estimate is an increase of 0.8%. Here’s what that gives us zooming in on the past 2 years:

Because “real” manufacturing and trade sales for December were only 0.4% lower than their all-time record in January 2022, the estimate forecasts that when the official result is reported on March 31, more likely than not it will set a new record.

As indicated above, I’ll go further an make a preliminary estimate for February in just a few days. And of course, once the “real” number for January is reported on March 31, I’ll update with a post on how well (or not!) the forecasts performed.

Real retail sales decline in February, forecast further deceleration in jobs growth


 - by New Deal democrat

Unadjusted for inflation, retail sales declined -0.4% in February, although January’s blockbuster number was revised even higher, from up 3.0% to 3.2%. Adjusted for inflation, real retail sales fell -0.8%. The below graph, which norms this reading to 100, shows that real retail sales have essentially been flat for almost 1 1/2 years:

Nevertheless, that is still 14% higher than just before the pandemic hit 3 years ago.

The trend in the official retail sales number is confirmed by the weekly Redbook sales report, which came in at higher by 2.6% YoY earlier this week, the lowest increase since February 2021:

Redbook is not adjusted for inflation, so in real terms Redbook has been declining YoY for several months.

Because consumption leads employment, the YoY% change in retail sales, /2, tends to lead jobs growth. Here’s what that looks like since July 2021:

Although I have discounted the YoY declines last spring vs. the pandemic stimulus spending spree of one year before, that there has been no growth in retail sales (except for January) since last summer strongly suggests that the deceleration in jobs growth is going to continue, and perhaps even intensify. Further, a YoY decline in real retail sales has almost always correlated with the onset of a recession. The continuing growth in jobs has been the biggest contraindication of that, and is probably the only important reason we have not started into a recession yet.

In that regard, manufacturing and trade sales will also be released today. Adjusted for inflation, they are one of the 4 monthly indicators highlighted by the NBER in determining the onset of recessions. I plan on having a detailed comment later today, so stay tuned.

Tuesday, March 14, 2023

Properly measured, consumer prices have been in *deflation* since last June


 - by New Deal democrat

The majority wisdom is that the Fed is going to go ahead and raise interest rates again when it meets next week. I have been arguing for months that the data has not supported interest rate hikes. As of this morning, I am officially taking the position that, properly measured, inflation has been conquered, and the US economy has actually had price *declines* since last June.

The reason, as I have been pounding on for over a year, is that the shelter component of official inflation, which is 1/3rd of the total, and 40% of the “core” measure, badly lags the real data - as in, by a year or more. So let’s start with an updated YoY graph of the official measure of inflation, Owner’s Equivalent Rent, which increased another 0.7% in February, with the FHFA house price index (/2 for scale), which has been declining since last June through its last reading for December:

As I have repeated many time, house prices lead OER by 12 months or more. I said over a year ago that OER would drag core inflation in particular higher, even as actual house prices peaked. And that is exactly what has happened, as OER is now up 8.0% YoY, an all-time record, while the FHFA was only up 6.6% in December, and declining YoY at the rate of -1.6%/month:

Note the above graph also shows CPI less shelter, which is up 5.0% YoY. If we were to project the recent declines in the FHFA index forward through February, it would be up only 3.4% YoY. Applying the 1/3rd weight of shelter, headline CPI would only be up 4.5% YoY if actual house prices rather than OER were used in the calculation.

But that is not the most important point by any means. Because measured from last June, CPI less shelter is *down* -0.4%:

If we substitute the FHFA house price index for OER, headline CPI would have been down -1.4% as of December (since that is when the reported FHFA data ends):

If the trend of FHFA price declines since last June is projected forward into February, those would be down -1.3%. In other words, if CPI used actual house prices rather than OER, since last June headline CPI would be *down* -0.7%. UPDATE: Here’s what YoY core inflation using the FHFA house price index rather than the official shelter measure looks like through December:

Because CPI for rent has accelerated since then, but house prices have likely continued to decline, there is every reason to believe that YoY core inflation using actual house prices is now below 3%.

Indeed, with “core” inflation only up 3.4% since last June:

If we were to substitute house prices as measured by the FHFA (down at a projected trend through February of -1.2% since then) for OER, then even core CPI would be down -0.3% since then. 

To repeat my main point: properly measured - certainly for purposes of Fed action - consumer prices in the US since last June have actually been in *deflation.* Further, there is every reason to believe that by the end of this spring, even YoY CPI, properly measured, would be no higher than 3.0% - within the Fed’s comfort zone.

Before I conclude, let me briefly note 3 other sectors.

First, now that oil and gas prices have stabilized, gas prices no longer made a big impact one way or the other on CPI. But because fuel oil declined a big 7.0% in February, CPI for energy as a whole declined -0.6%. YoY energy prices are up 5.0%, but since last June’s peak are down -11.3%:

Another hot spot for inflation has been food prices. That is decelerating, if not entirely abating, as well. Food prices increased 0.4% in February, the smallest increase since April 2021:

YoY food prices remain up 9.5%:

Finally, new and used vehicle prices, another hot spot, are also generally moving in the right direction. The price of new vehicles increased 0.3% in February, while used vehicles declined -2.8%. Thus YoY new vehicle prices are up 5.8%, while used vehicles are down -13.6%:

To summarize: outside of the official measure of shelter, the only significant sector to show a price increase of more than 0.3% was food. Both headline and core inflation are only up outside of the Fed’s comfort zone because of the way shelter prices are calculated.

But whether or now OER “should” be used to calculate CPI, it most certainly should *not* be used by the Fed to determine monetary policy.  When properly measured, there has actually been *deflation* of both the headline and core measures since last June, and even on a YoY basis inflation is very likely to be within the Fed’s comfort zone in several months.