Campbell Harvey unravels the Realities of Inflation : Deciphering CPI vs. Real-time Data
Duke’s esteemed Professor Campbell Harvey sheds light on the complexities surrounding the inflation narrative in the United States.
At the heart of Professor Harvey’s claim recently on Linkedin speaks to a fundamental discrepancy between the reported Consumer Price Index (CPI) and the actual real-time data on housing and rental costs. And as a result, the mistaken conclusions by the Federal Reserve.
Campbell Harvey | LinkedIn
Inflation, a pivotal economic metric, has often been subject to analysis, interpretation, and criticism. As per the Federal Reserve’s assessment, the inflation rate stands at 3.7%. However, Professor Harvey challenges this assertion, contending that the genuine inflation rate is only 1.5%. He sees the Fed’s pronouncements about battling inflation as misplaced, even dubbing it a “false narrative.”
Harvey’s main bone of contention here is the CPI’s shelter component, which forms a colossal 35% of the index. While the CPI indicates a 7.3% YoY rate for shelter, a closer examination of real-time data suggests a glaring divergence. When one looks at popular indices like Case Shiller for housing, the YoY change is either negligible or even negative. Similarly, averaging the data from trusted sources like Redfin, Rent.com, and Apartmentlist.com paints a similar picture for rentals, with rates hovering around 0% or -1% YoY.
While alternative CPI measures have become proposed by various experts – some excluding volatile components like food and energy or trimming extreme price hikes – a significant solution lies in revisiting the Bureau of Labor Statistics’ “owners equivalent rent” (OER) calculation. Factoring in the real-time price and rent growth, approximately 1% YoY, the recalculated CPI would indicate an inflation rate of 1.5%.
Harvey believes even if we assume a 2% increase in shelter, the inflation rate is only 1.8% YoY, both numbers considerably lower than the Federal Reserve’s target.
Reflecting on past decisions, Professor Harvey recalls the initial inflation misread as “transitory” by the Fed. In July 2021, despite housing prices skyrocketing and rental rates surging, the OER reported a modest 2.4% shelter inflation. For those closely monitoring real-time data, it was evident that the CPI would inevitably rise once this data was incorporated.
What’s concerning Harvey is the potential repercussions of the Fed’s reliance on potentially outdated information. Misinterpreting inflation figures and signaling unnecessary hikes can inadvertently drive the economy towards a recession. Given that the impressive 2023 GDP numbers were fueled by consumer spending, leveraging COVID savings, by 2024, this spending spree is predicted to taper off as these savings diminish.
Moreover, Harvey speaks to the ominous inverted yield curve, which typically precedes a recession by approximately 13 months, points towards December 2023. With such indicators in place, 2024 seems to carry a heightened risk compared to 2023.
