Consumer Price Index
‘Worrying’ Metric Shows Massive Inflation Spike Hammered US, Far Higher Than Reported: Former Treasury Secretary Larry Summers
Published
2 months agoon
By
adminFormer U.S. Treasury Secretary Lawrence Summers says an old school method of tracking inflation may reveal the real amount of economic pain that Americans have had to endure.
Summers has co-authored and released a new paper exploring the effect of high interest rates on the American consumer.
The paper, in part, aims to paint an alternate and more accurate view of inflation by incorporating economist Arthur Okun’s pre-1983 system of measuring inflation, which took into account personal interest rates and housing financing costs.
After 1983, those metrics were taken out of the consumer price index (CPI), which Summers and the authors of the paper argue may be giving an inaccurate portrayal of inflation in the US.
Using the pre-1983 method of measuring inflation, the report says that in November of 2022, CPI spiked by about 18% – contrary to the official 4.1% number determined by the government.
The new numbers paint a darker picture of the inflation that Americans are dealing with to this day, with the report stating the pre-1983 measure offers a “more worrying picture of inflation in the current moment than the official inflation numbers.”
Summers broke down the discrepancy via Twitter,
“Pre-1983, mortgage costs were in the CPI as were car payments pre-1998. Now, price indexes do not include borrowing costs. Thus, when interest rates jumped last year, official inflation did not fully capture the effects it would have on consumer well-being…
We show that if we make an effort to reconstruct the CPI of Okun’s era—which would have had inflation peak last year around 18%, we are able to explain 70% of the gap in consumer sentiment we saw last year.”
The revelation that inflation was likely much higher than reported may explain the discrepancy between the official numbers and the soaring cost of everyday expenses like groceries and housing.
Summers also notes that personal interest payments, which are not incorporated into the government’s CPI system, increased by more than 50% in 2023.
Summers and the co-authors of the paper also argue that the higher cost of borrowing has created a “deeply felt pain point” for consumers by putting the housing market in a “lock-in” state whereby homeowners are deterred from selling due to potentially higher mortgage payments on their next home, while underwhelming price drops aren’t enticing new buyers.
“The Federal Reserve’s rate hikes have pushed mortgage rates to two-decade highs while house prices have yet to come down towards pre-pandemic levels. The market is in stasis with both homeowners and would-be buyers reporting high levels of disappointment.”
The paper, titled “The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly,” can be read here.
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Chamath Palihapitiya
Billionaire Chamath Palihapitiya Predicts Market Rally, Says $6,000,000,000,000 Waiting To Be Deployed
Published
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November 15, 2023By
adminBillionaire venture capitalist Chamath Palihapitiya says that markets are ripe for a strong rally as a deluge of capital looks to find a new home.
In a new episode of the All-In Podcast, the billionaire says that the macro picture is starting to look positive for the United States.
The Social Capital founder first looks at the consumer price index (CPI), which tracks the country’s rate of inflation over time. According to Palihapitiya, the CPI is starting to roll over indicating that high inflation rates are a thing of the past.
“We are really in a decent place with inflation. If you think about what’s going to happen in the next six months, it’s mostly in the bag… There’s a lag effect on a handful of [CPI] components, specifically rents, which when you roll them into this inflation rate, you’re going to see it really, really turn over very quickly.
So we know that inflation is falling. It’s going to fall even more.”
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“I think the setup is basically the following. There’s less money in the system. That’s a positive.
There’s more money on the sidelines… Look at the amount of money in money market funds – $6 trillion and growing, so that’s a really positive sign which is money will need to find a home…
So that’s trillions of dollars that have to get deployed… Now you introduce rate cuts and that’s a real accelerant. More than likely, I think what that means is that markets are set up to do pretty well, equity markets specifically.”
Palihapitiya ends his analysis by saying that he’s optimistic about the prospects of the US economy with the Federal Reserve poised to cut rates by mid-2024.
“Inflation is very much in the rearview mirror. Rates are going to get cut by the middle part of the year. The economy looks like it’s going to be a soft landing. That is actually very beneficial for the sitting president. It’s also good for equities. It’s good for us… I think we’ve had a fundamental change.”
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