HOW HIGH IS INFLATION? IT DEPENDS WHICH ONE / THE WALL STREET JOURNAL

How High Is Inflation? It Depends Which One

Federal Reserve policy makers are closely watching inflation, but probably not the gauge you are using, and theirs isn’t quite as high

By Justin Lahart 

Since March 2020, the estimated median rent of new leases in several Texas cities has increased by double digits./ PHOTO: BRANDON BELL/GETTY IMAGES

The inflation numbers that people pay the most attention to and the inflation numbers that the Federal Reserve cares about aren’t the same. 

In the months ahead, those differences could really matter.

Economists polled by The Wall Street Journal expect Thursday’s consumer inflation report from the Labor Department will show that overall prices in February rose by 7.8% from a year earlier, their biggest gain since January 1982. 

Core prices, which exclude food and energy items in an attempt to better capture inflation’s trend, are expected to show a 6.4% rise, which would be the biggest gain since August 1982.

The February reading for the Commerce Department inflation gauge that the Fed watches, and bases its 2% inflation target on, won’t come out until March 31. 

But it will almost certainly show milder price increases than the Labor Department measure. 

The January core reading for the Commerce Department measure showed a 5.2% gain from a year earlier, for example, versus the 6% gain the Labor Department showed.

The differences between the two inflation measures largely come down to differences in how they are constructed. 

The weightings for items in the consumption baskets the Labor Department uses to put together its main inflation indexes are based on surveys of urban consumers and only measure out-of-pocket expenses. 

The Commerce Department’s indexes are based on the actual expenditures of both urban and rural consumers and includes spending done on the part of consumers, such as employers’ contributions to health insurance.

One place where the consumption baskets used by the Labor and Commerce Departments are really different is housing. 

Both rely on something called owners’ equivalent rent, a somewhat contentious measure that bases homeowners’ housing costs on what people would need to pay in rent for the homes they own. 

But actual rents and owners’ equivalent rent account for about two-fifths of the Labor Department’s core consumption basket, while for the Commerce Department they account for less than one fifth.

This matters because rents have been surging. 

A price index of rents from Zillow was up by 15.9% from a year earlier in January, for example. 

But the jump in rents seen over the past year has yet to be fully reflected in the Labor Department and Commerce Department rent and owners’-equivalent rent measures because these are based on prices paid on both new and existing leases.

Put otherwise, even if the Zillow measure suddenly stopped going up, rent prices in the inflation index would probably keep rising as people’s old leases expired and they signed new, more expensive ones. 

Again, those rent price increases matter much more for the Labor Department’s measures of inflation than the Commerce Department’s.

The upshot is that at the very least the gaps between the two inflation gauges could remain quite wide. 

This could especially matter later this year if inflation in goods prices, driven by pandemic disruptions and now Russia’s invasion of Ukraine, begins to subside. 

One can imagine a world in which the Fed thinks inflation has really started to come back down while others vehemently disagree.