Inflation’s Shapeshifter: Measuring It the European Way and Seeing Beyond the Hype

At the heart of most financial discussions these days, inflation is the recurring boogeyman that haunts the dreams of economists and investors. A core inflation rate below 3% would be a reason for the Federal Reserve to heave a sigh of relief, and it would have a positive domino effect on stocks, sparking an uptrend and quelling consumers’ anxieties about the escalating cost of living. But can this dream become reality? It seems possible, especially if we choose to measure U.S. price changes the way Europe does.

In May, by European standards, the U.S. had already dipped below the dreaded threshold, dropping even further in June. However, a stark contrast is painted when U.S. inflation data is measured the traditional way; the figures announced last Wednesday showed core inflation reaching a significant 4.8% for June. This discrepancy stems from the different methodologies employed by the U.S. and Europe in calculating inflation. The U.S. Bureau of Labor Statistics (BLS) does calculate American price increases the European way, though this alternative is relatively less known.

It is indeed baffling to see such a radical discrepancy between the two methods, enough to throw off investors who might be inclined to believe the current consensus: that inflation is decreasing, though not as rapidly as the Fed would prefer. The alternative narrative suggested by the lower European figures may disrupt this perceived stability.

The difference primarily arises from what each measure excludes. The U.S. core inflation, which eliminates the volatile factors of food and energy, was measured at 2.6 percentage points higher than the European-style inflation, otherwise known as the Harmonized Index of Consumer Prices (HICP). This marked the greatest gap ever recorded between these two measures. The HICP excludes what is called “owners’ equivalent rent” or imputed rent, an imaginary cost that a homeowner would pay to rent their own home, which makes up about a third of the U.S. core CPI.

Inflation's Shapeshifter: Measuring It the European Way and Seeing Beyond the Hype

Removing such a contentious component, which is based on speculative calculations by homeowners on the rental value of their houses, can lower the core inflation to a more acceptable 2.3%. While it is important to consider food and oil prices due to their impact on the cost of living, their exclusion from core inflation allows a more focused view of whether the economy is generating pressures the central bank needs to mitigate.

So, why does inflation continue to be a cause for concern? The answer lies at the intersection of tradition, ignorance, and fear. The Consumer Price Index (CPI) has long been the preferred measure of inflation in the U.S., even though the Federal Reserve’s inflation target is based on the Personal Consumption Expenditures Price Index (PCE) from the Bureau of Economic Analysis. The PCE generally produces a lower figure than the CPI but still places considerable emphasis on imputed rent.

The Fed faces a challenge. Even if it were to regard the HICP as a superior measure—which it doesn’t appear to—there’s no easy path to making a change without political fallout. The inflation data is already subject to considerable scrutiny and skepticism from economists who argue that enhancements to the indexes typically result in lower inflation than previous methods.

The crux of these measurement dilemmas is determining if the economy’s underlying pressures are so robust that further restraint is necessary. If a vigorous jobs market leads to workers with larger paychecks, consumer demand could surge, allowing companies to increase prices. This scenario would compel the Fed to continue raising rates.

However, the lower core HICP inflation suggests that the robust jobs market may be less alarming than the CPI measure indicates. Hawks, however, worry that persistent above-inflation pay raises could fuel inflation, as companies pass on increased costs. This could potentially elevate inflation expectations, leading to further wage demands.

Conversely, if expensive borrowing causes companies to cut spending, hire fewer employees, and resist pay demands, wage growth could moderate and demand could decline, encouraging the Fed to relax its monetary policies—provided that the economic slowdown doesn’t turn into a recession.

Inflation's Shapeshifter: Measuring It the European Way and Seeing Beyond the Hype

While indicators often align after periods of divergence, the rent increases, which have slowed down, may cause the CPI and PCE to gravitate toward the HICP. Unfortunately, even if core inflation drops further, it will still exceed the comfort zone according to the CPI and PCE measures that the Fed and investors prioritize.

Inflation is not the sole economic indicator sending mixed signals. A multitude of indicators are telling different narratives about the state and direction of the economy, a topic I’ll revisit in the next installment of Streetwise. Meanwhile, the current inflation conundrum leaves me both concerned and confused—not an ideal state of mind when trying to predict market movements. Regardless, it’s important to remember that while the face of inflation may change depending on how we measure it, its impacts on our economy are real, persistent, and require informed interpretation and action.

Author:Com21.com,This article is an original creation by Com21.com. If you wish to repost or share, please include an attribution to the source and provide a link to the original article.Post Link:https://www.com21.com/inflations-shapeshifter-measuring-it-the-european-way-and-seeing-beyond-the-hype.html

Like (1)
Previous July 14, 2023 5:33 pm
Next July 16, 2023 5:40 pm

Related Posts

  • The Global Economic Outlook Brightens As Inflation Eases

    It’s no secret that the global economy has been struggling for years now. From high unemployment to rising prices, the economic outlook has been bleak. But, there’s good news! The economic outlook is brightening as inflation finally begins to ease. In this blog post, we’ll explore how the global economic outlook is improving and why inflation is easing. We’ll also look at what this means for businesses and consumers around the world. Get ready to dive into the data and see how it all adds up in the end! The…

    January 27, 2023
    0
  • Drought and Inflation: A Looming Threat to Global Food Security

    Just as the world was starting to breathe a sigh of relief after the tumultuous impact of the pandemic and Russia’s invasion of Ukraine on food prices, a new threat looms on the horizon. A drought spanning across America’s breadbasket threatens to exacerbate food inflation, further straining consumers’ wallets. The dry spell has affected the wheat fields of the Great Plains and the Corn Belt in the Upper Midwest, leaving some areas with mere fractions of their regular rainfall as we approach crucial growing periods for corn and soybeans. This…

    July 1, 2023
    0
  • The Impact of Inflation on America’s 401ks and Retirement Plans: Strategies for Mitigation

    Inflation is a naturally occurring economic phenomenon that occurs when there is an increase in the general price level of goods and services in an economy over a period of time. This increase in prices affects the purchasing power of money, making it difficult for people to maintain their standard of living. Inflation can also have a significant impact on the retirement savings of Americans, particularly those who have invested their savings in 401ks and other retirement plans. The current rate of inflation in the United States has been steadily…

    February 10, 2023
    0
  • Navigating Tipflation: 6 Strategies to Keep Your Budget on Track

    Introduction: In recent times, the act of tipping has become more prevalent and, some might say, more perplexing. From digital prompts at point-of-sale to tip jars at the local bakery, the rise in tip solicitations has given birth to what some are calling “tipflation.” This phenomenon is driven by both pandemic-related acts of kindness and the widespread use of digital card readers. As a result, navigating the world of tipping has become a bit awkward and challenging. In this blog post, we’ll explore six strategies to beat tipflation, allowing you…

    November 10, 2023
    0
  • Inflation is Wreaking Havoc on the American Middle Class

    In the past decade, American households have seen a dramatic erosion of their purchasing power. This is largely due to inflation, which has been steadily eroding our buying power for years now. The result of this inflationary pressure is that the middle class in America is struggling to keep up with rising costs of living. From rising food and housing prices to increasing taxes, the burden on the American middle class is becoming increasingly difficult to bear. In this article, we will explore how inflation has had a detrimental impact…

    February 10, 2023
    0
  • U.S. Continues to Attract Foreign Investment Despite Global Retrenchment

    The United States has always been a beacon for international investment, a beacon that continued to shine brightly last year despite mounting global uncertainties and fiscal challenges. According to recently released data from the United Nations, the U.S. remained the top international investment destination in 2022, albeit experiencing a dip in inflows due to a sharp decrease in foreign purchases of American companies. In 2022, the U.S. attracted $285 billion in foreign investment, a significant drop from the $388 billion received in 2021. Nevertheless, these figures need to be examined…

    July 5, 2023
    0
  • Beyond the Dollar: Charting the Course for Alternative Currencies in a Shifting Monetary Landscape

    A specter is haunting the world’s financial stage – the specter of a possible demise of the US dollar. Not necessarily an imminent event, but it’s prudent to consider alternatives in case this economic titan eventually stumbles and falls, consumed in a potential hyperinflationary fire. This threat, while seemingly distant given the resilience of the dollar in recent years, is not entirely far-fetched. Despite the reckless policies over the past three years, the US dollar has remained steadfast. However, if it loses its status as the international reserve currency –…

    July 4, 2023
    0
  • Navigating the Uncharted Waters of the Global Economy in 2023

    As the world continues to grapple with the impacts of COVID 19, the global economy in 2023 is looking increasingly uncertain. It is more important than ever for businesses to understand the interconnectedness of the global economy, position themselves for maximum growth, determine the best strategies for international expansion, and embrace the benefits of digital currency. In this blog post, we will explore these topics, as well as innovative investment opportunities, changes in international trade regulations, new markets for expansion, risk mitigation strategies, leveraging of new technologies, and the cultivation…

    January 20, 2023
    0
  • What Is Stagflation? Inflation Vs. Stagflation

    Stagflation refers to a state of economic conditions characterized by significant inflation, high unemployment, and slow or no economic growth. The term itself is a combination of “stagnation” and “inflation”. Prior to the 1970s, dominant economic theories posited that inflation would increase when unemployment rates were low and decrease when they were high. This theory was based on the Phillips Curve, an economic model that proposed an inverse relationship between unemployment and inflation. However, the prevalence of stagflation in the 1970s and 1980s surprised economists and forced them to refine…

    February 11, 2023
    0
  • Reading the Economic Tea Leaves: Is a US Recession Around the Corner?

    Introduction The specter of a looming recession in the United States has been haunting economic discussions for more than a year. While the recession has not yet materialized, it’s essential to acknowledge the historical lag between Federal Reserve interest rate hikes and their impact on the economy. This lag often spans 12 to 18 months, which is why the signs of a mild recession may be on the horizon. In this article, we will examine various economic indicators that can shed light on the possibility of a recession and provide…

    October 20, 2023
    0

Leave a Reply

Your email address will not be published. Required fields are marked *