This article from MarketWatch, is a very good explanation as to the inherent problems of relying on the core CPI as opposed to the core PCE, which won't be released until June 29th. The PCE (Personal consumption Expenditure index)is a more up to date inflation reader as it computes housing costs differently. I any case, even though tomorrow's CPI reading will be market moving short term, it will not act as decisively for the Feds as one may think.
...." During the heady days of the housing boom, more people wanted to buy a home in order to cash in on the big gains. Condos were converted from rentals to owner-occupied. Home construction boomed and rental vacancy rates soared, keeping rents down even as housing prices were rising at double-digit rates.
But now, more people find themselves priced out of the market, or are hesitant to pay the asking prices. Vacancies are falling and rents are going up.
So, even though home price appreciation is now slowing, it's finally showing up in the CPI, years late.
The impact on the CPI has been to understate the inflation in housing during the boom, and to overstate inflation during the correction.
Apparel prices and equivalent rents could have a major impact on the CPI, but might not sway Fed officials. They understand the statistical problems with the CPI, which is one reason why they seem to prefer a different gauge of inflation known as the personal consumption expenditure price index, which treats housing costs differently.
The core PCE index has been slightly better behaved than the core CPI. It's risen 2.1% in the past year, compared with 2.3% for the core CPI. Yet another gauge that's gaining adherents who say it's more accurate -- the market-based PCE index -- has risen just 1.8% in the past year.
Unfortunately, the PCE price indexes for May won't be released until June 30, the day after the Fed's meeting.
"To the extent a pickup in core prices mainly reflects higher rents, and the pickup in rents is a byproduct of the sharp weakening in home sales recently, we believe the implications for monetary policy are less straightforward than a broad-based pickup," said Sam Coffin, an economist for UBS. "Sharp weakening in home sales and prices, if sustained, would likely lead to a significant slowing in growth, shifting the risks on inflation to the downside again."
...." During the heady days of the housing boom, more people wanted to buy a home in order to cash in on the big gains. Condos were converted from rentals to owner-occupied. Home construction boomed and rental vacancy rates soared, keeping rents down even as housing prices were rising at double-digit rates.
But now, more people find themselves priced out of the market, or are hesitant to pay the asking prices. Vacancies are falling and rents are going up.
So, even though home price appreciation is now slowing, it's finally showing up in the CPI, years late.
The impact on the CPI has been to understate the inflation in housing during the boom, and to overstate inflation during the correction.
Apparel prices and equivalent rents could have a major impact on the CPI, but might not sway Fed officials. They understand the statistical problems with the CPI, which is one reason why they seem to prefer a different gauge of inflation known as the personal consumption expenditure price index, which treats housing costs differently.
The core PCE index has been slightly better behaved than the core CPI. It's risen 2.1% in the past year, compared with 2.3% for the core CPI. Yet another gauge that's gaining adherents who say it's more accurate -- the market-based PCE index -- has risen just 1.8% in the past year.
Unfortunately, the PCE price indexes for May won't be released until June 30, the day after the Fed's meeting.
"To the extent a pickup in core prices mainly reflects higher rents, and the pickup in rents is a byproduct of the sharp weakening in home sales recently, we believe the implications for monetary policy are less straightforward than a broad-based pickup," said Sam Coffin, an economist for UBS. "Sharp weakening in home sales and prices, if sustained, would likely lead to a significant slowing in growth, shifting the risks on inflation to the downside again."
This entry was posted
on Tuesday, June 13, 2006 at 3:36 PM.
