Breaking News: “Headline inflation” for June was… 5.4{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}. The Bureau of Labor Statistics says so. Wow.

That report is being greeted with choreographed shock and dismay by some politicians and much of the media, with write-ups that make it sound like the country has time-warped back to the 1970s. 

Or not. Many people now realize that the headline number – the raw Consumer Price Index (CPI) – is highly distorted. They may not know how highly distorted. Currently, several factors are inflating its value – yes, “inflation” is inflated – to the point where the raw CPI is practically meaningless, even misleading. 

The details are covered in a previous column. Here, in summary, is what the June headline number would look like if these distortions were eliminated.  

Core CPI vs Raw CPI – Subtract 0.9{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

Volatile food and energy prices are nearly always excluded by serious analysts, for good reason. The variability of the unadjusted CPI is about 7 times greater than the variability of the Core CPI. The energy price series is almost 30 times more volatile. Over the long term, the averages are nearly identical. But over the short term the Core CPI provides a much more stable foundation for monetary policy decisions. This volatility has to be neutralized to gain proper perspective on short-term price movements.

The “Core CPI” in June was 0.9{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} lower than the headline number.

Follow-up question: Why then is the raw CPI still offered as the headline number?  

PCE vs CPI – Subtract 0.3{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

For the past 20 years, for very good reasons, the Federal Reserve has preferred the Commerce Department’s metric called the Personal Consumption Expenditure Index (PCE) over the Labor Department’s CPI. The PCE has been extensively evaluated. It is based on a sounder concept of economic behavior. It is simply a better measure

  • “The reason why the Fed prefers the PCE index [is that] it’s a better reflection of reality and how people consume.” 

We don’t have June’s PCE yet. It won’t come for another two weeks. But we have the past trend. The PCE runs, on average over the last 20 years, about 0.3{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} lower.  

Another question: Why does the press give prominence to a number that policy-makers largely ignore?

Adjust for the Base Effect – Subtract 0.9{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

The CPI is a measure of the June 2021 number over the June 2020 number. But in June 2020 the country was still deep in the pandemic trough. We were just wrapping up an 8.5{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} annualized decline in GDP for the 2nd quarter.


This smashed the trend line, which throws off later comparisons for a while – because the left-hand anchor of the year-over-year percentage calculation is so deeply depressed. This inflates the current year-over-year percentage increase (i.e., the CPI!) by about 0.9{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} for the month of June 2021 – the so-called base effect.


Question: This problem is well-understood even by some journalists (lately). The base effect will disappear another few months. So, since we know that the CPI right now is off, by a lot, why not just wait until this statistical glitch “clears” the system before making year-over-year comparisons again? We have made many adjustments because of the pandemic. Why not this one? 

Adjust for Obvious Outliers (e.g., Used Cars) – Subtract 1.5{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

The CPI is made up of a “basket” of goods and services which consumers purchase on a regular basis, or as the Bureau of Labor Statistics puts it: “goods and services that people buy for day-to-day living.”

One of the components in the consumer’s basket is – used cars. From June 2020 to June 2021 used car prices increased by 45.2{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}! This item is assigned a 3.166{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} weighting in the consumer’s “basket” which means that it contributed something like 1.5{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} to the total basket’s year-over-year increase (i.e., the raw CPI). The BLS admits that “more than one third” of the June CPI figure comes from the used car component alone.

There is a lot wrong with this. In brief summary:

  • an argument can be made that used cars are assets, like houses, with a long life (more than 10 years and over 200,000 miles on average today — and that lifespan is growing). If a used car is a long-lived asset rather than an expendable product like a box of corn flakes that is purchased and consumed, then used cars should not be included in the CPI
  • used cars in any case hardly fit the description of an item “that people buy for day-to-day living” – should big ticket items, purchased only very occasionally and usually involving a great deal of discretion as to timing and substitution opportunities – you have to buy gasoline today to get to work, perhaps, but you normally don’t have to buy that used BMW this very week if the price is not right – should such items be part of the normal shopping basket?
  • the used car market was one of the most severely impacted sectors of the economy in 2020; there have been disruptions in the automotive markets generally, affecting new cars (chip shortages), used cars, rental cars, auto insurance… the whole eco-system has been thrown out of joint; it makes no sense to view the current price gyrations as a normal pattern 

The question of whether used cars should be a part of the CPI calculation has been debated for decades. In 1995, even the Congressional Budget Office decided to exclude Used Cars from its calculations of the CPI, along with food and energy. (In a future column, I will look at this example more closely.) 

Other Obvious Pandemic Effects — Subtract 0.4{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

There are other distortions in the June number, particularly with energy pricing and with certain other categories that were severely depressed in the pandemic and are now bouncing back with significant component-level base effects. These include:

  • Air fares (0.7{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} weighting in the basket), up 24.6{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} year over year
  • Hotel rooms (0.86{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} weighting), up 16.9{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}
  • Car Rental prices (0.185{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} weighting), up 87.7{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}

These are all sectors that were simply devastated by the pandemic in the second quarter of 2020. Hotel occupancy rates fell from 61{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} to 24{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}. Airline passenger miles fell 96{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588}. These severe dislocations should be discounted now. Together, they add about 0.4{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} to the June CPI by my calculation. 

In Sum — There is No Inflation 

If you’re keeping score, with these deductions we’re down to something under 2{c9ada2945935efae6c394ba146a2811ce1f3bfd992f6399f3fbbb16c76505588} for the adjusted price rise in June 2021 relative to June 2020. 

Perhaps some of these adjustments could be further refined. Perhaps counter-arguments can be entertained. But my point is that by any meaningful definition of true inflation, the headline number is greatly overstated.

One more point. The monthly inflation scare headline is like that car alarm that keeps going off in the middle of the night when the garbage truck rumbles by. It is annoying, but we know that we don’t have to call 911 every time we hear it go off. Why do we allow the inflation alarm to rattle us this way, every month, without a sense of perspective? 

We are fortunate that the Fed, and the markets, are able to evaluate these numbers with an appropriate skepticism. But there is a lot of irresponsible journalism here. The distorting factors reviewed above are not hidden, and in fact they are widely understood today, even by most journalists — and yet many in the media, and many professional pundits (who certainly know better), still choose to emphasize these misleading figures. Does the press not have a duty to educate the public? Or is it really just about selling more newspapers, or capturing more clicks?