Market Update February 16, 2022

THE QUICK FIX TO INFLATION – CHANGE THE CPI MEASUREMENT!
The government is changing the way they measure CPI this year. So what if inflation is running a little too hot? No problem! Should we bring down prices? Nope! Just change the weight of the things being measured. Why? So politicians can get re-elected without having to worry about drastic numbers in the headlines.

Sorry for the glib attitude. The CPI weights have been changing since the 70’s. However, starting in the 90’s weights were started to be manipulated as to hide inflation. So, to no one’s surprise, it’s no different this year either. Let’s dive into January 2022’s CPI readings! Here are some of the primary category weight changes:

Food – lowered
13.99% to 13.37%

Energy – lowered
7.54% to 7.35%

Commodities – increased
20.67% to 21.70%

Shelter – increased
32.39% to 32.95%

To understand why some categories were increased and some were lowered (and what this all means), we need to take a deeper dive into the categories themselves:

Food
Weight was moved from “food away from home” to “food at home” (restaurants to cooking at home). Why is this important? Because when supply chains are fixed and food prices stabilize (at the grocery store) this will cause the food category to more strongly reflect a slowdown or decrease in food costs. However, restaurants, or “food away from home,” will not expierence the same price stabilization as the grocery stores due to the rising cost of labor. This change will put less weight into the ever rising cost of eating out and instead emphasize food prices at the grocery store.

Energy
As a barrel of crude oil broaches $100 per barrel (deja vu anyone?) rising energy prices can be curbed in terms of inflation by decreasing their weight (see numbers above). Unlike the other categories, the BLS doesn’t see supply chain fixes curbing energy prices, so reducing the weight was their best option.

Commodities
The largest change we saw in this category is that of used and new cars which actually had their weights increased. Why increased? Well similar to food, as supply chains (chip shortages) are resolved, used cars and new cars will be available once again – causing their prices to stabilize (or even perhaps decrease). By giving cars more weight, their corresponding inflation numbers will be more pronounced as prices stabilize.

Shelter
In this category we saw a huge shift in the “Owners’ equivalent rent” category which increased in weight from 23.51% to 24.25%. What is “Owners’ equivalent rent” you might ask? This is when the BLS supposedly calls up owners and asks how much they would rent out their primary residence out for. I don’t think I have to go into much detail to explain why this is such a bogus number. Most homeowner’s are not aware of how much their properties would rent out for (not to mention how much rent is currently increasing by). This number is what allowed the BLS to say that last 12-months we only saw a 3.7% increase in housing costs. Giving this more weight will undoubtedly cause the CPI to understate the increased cost of housing even more. Realtor.com, which mines the MLS for data, states that rents have gone up over 12% in the last 12-months. I wonder why the BLS doesn’t use this metric?

TDLR:
By adjusting the weights in the largest of categories, the government will have solved the inflation. Here’s a meme that summarizes it best: