The Federal Reserve can’t see the probable economic crash that is coming because it’s still looking into the rearview mirror, where it sees nothing but high inflation. The danger arises because the consumer price index and the personal consumption expenditure price index — the two most important inflation gauges — have a fatal flaw in the way they measure shelter costs.
“ If you get shelter prices wrong, your view of inflation is also going to be wrong. ”
As a result of that flaw, the price indexes will miss a crucial turning point in the effort to restore price stability. The Fed is winning a major battle in the fight against inflation, but policy makers don’t believe it. That means the Fed is likely to raise interest rates too high and keep them high for too long while it waits for confirmation, which will come too late. Joy Wiltermuth: Zillow sees rent growth tumbling, but that isn’t what the Fed’s trackingPowell doesn’t get it Fed Chair Jerome Powell was asked about this at his last press conference a week ago following another jumbo rate hike and promises to raise rates a lot more in coming months. “I think that shelter inflation is going to remain high for some time,” Powell said. “We’re looking for it to come down, but it’s not exactly clear when that will happen.…You’ve just got to assume that it’s going to remain pretty high for a while.” Powell didn’t even hint that the Fed was making significant progress in controlling shelter costs. Maybe Powell was just trying to stay on the hawkish message he’s been trying to deliver, but, then again, maybe Powell and other policy makers really don’t get it. Make no mistake, shelter prices are coming down fast, even if that fact won’t be immediately visible in the official inflation statistics because of the way the price indexes are constructed. Shelter is a huge portion of the typical family’s budget and accounts for a third of the CPI (and 15% of the PCE price index). If you get shelter prices wrong, your view of inflation is also going to be wrong. Rex Nutting: Real house prices plunge after double-digit increases—but relief won’t show up in inflation reports anytime s …