Why Did Economists Blow The CPI Forecast So Badly This Month?

CPI data from the BLS, chart by Mish

Bloomberg Economist Expectations

• CPI M/M: 0.7% Expected vs 1.0% Reported
• CPY Y/Y: 8.2% Expected vs New 40-Year High 8.6% Reported
• CPI Excluding Food and Energy M/M: 0.5% Expected vs 0.6% Reported
• CPI Excluding Food and Energy M/M: 5.9% Expected vs 6.0% Reported

It was a clean miss economists undershooting inflation in every estimate.

Spotlight Shelter

The shelter index is a whopping 32.44 percent of the CPI. So despite the fact that it is only up 5.5% year-over-year, the jump contributed an outsized percent to overall year-over-year inflation.

I have been warning about this for a couple of months.

How Far Behind the Curve is the BLS and Fed on Rent Inflation?

National Rent data from ApartmentList, OER and Primary Residence from the BLS, chart by Mish

On June 2, I asked How Far Behind the Curve is the BLS and Fed on Rent Inflation?

Those red and blue dashed lines were my projections on June 2. Owner's Equivalent Rent (OER) and Rent of Primary Residence are severely lagging National Rent Prices. 

OER is the mythical price one would pay to rent one's own house from oneself, unfurnished, without utilities.

I commented "There will be upward pressure on rent in the CPI for the next three to six months."

CPI Percentage Weights 

CPI Percentage Weights from BLS, chart by Mish

Percentage Weights May 2022

• OER: 23.78%
• Rent of Primary Residence: 7.28%
• Energy: 8.26%
• Food at Home: 8.30%
• Food Away from Home: 5.12

The numbers change slightly every month. Also, the shelter index is a bit higher than Rent plus OER. 

CPI Month-Over-Month OER and Rent 

CPI data from BLS, chart by Mish

OER and Rent both jumped 0.6 percent month-over-month. Those are big jumps given their weight in the CPI. 

CPI Month-Over-Month Percent Changes 

CPI data from BLS, chart by Mish

Food was up 1.1 percent for the month and shelter 0.6 percent but the latter had a far bigger impact on the overall jump.

Percentage Contribution to Monthly CPI 

CPI data from BLS, calculations and chart by Mish

CPI Energy Month-Over-Month 

CPI data from BLS, chart by Mish

Energy was the single biggest reason for the jump in the CPI but I suspect economists mostly got that correct. 

Inelastic Items

Much of the CPI is totally inelastic, especially food and rent. 

The Fed can impact leisure driving but not driving to work except at the cost of jobs. 

Moreover, the Fed cannot impact poor energy decisions by the Biden administration.

For discussion of the administration's role, please see Why Are Energy Prices High? Blame President Biden

That does not imply Biden is solely responsible but he is largely responsible especially on sanction policy and regulations. 

Regarding sanctions, I am confident Trump would have made the same mistakes but he would not have made the other regulatory errors. 

Looking Ahead

• Rent: I stick with my assessment on rent: "There will be upward pressure on rent in the CPI for the next three to six months." See How Far Behind the Curve is the BLS and Fed on Rent Inflation?
• Food: Food inflation also seems baked in the cake. For discussion, please see Ukraine Safe Passage Grain Talks Fail, Expect Still Higher Food Prices Globally
• Energy: How fast can the Fed destroy demand?