- The consumer price index is a key measure of inflation.
- The CPI measures how quickly prices change in specific categories of consumer goods and services.
- Categories like housing, health insurance, and technology have idiosyncrasies that make inflation difficult to measure. Their inflation data may not reflect reality for consumers.
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Housing is perhaps the most important category in the consumer price index, a key barometer of inflation.
Housing is the largest expense for the average American family. The “shelter” category that measures costs for renters and homeowners thus accounts for more than a third of the CPI weight, the most of any category.
“Every single component [of the CPI] it has some idiosyncratic measurement issues,” Zandi said. “But housing is especially important. It drives much of the inflation train.”
Price moves in the “haven” were generally muted before the pandemic, economists said. But Covid-19 has warped that dynamic: Housing costs have risen, but slowed and even started to fall in some areas, economists said.
Housing is especially important. It drives much of the inflation train.
chief economist of Moody’s Analytics
Nationwide, Americans saw rents grow 5 percent in April from a year earlier, to about $2,018 a month on average nationwide, according to Zillow Observed Rent Index data. This is a significant slowdown from the 17% growth during the previous year, from April 2021 to April 2022.
Here’s the problem: CPI doesn’t capture real-time price action.
It works with a significant lag, meaning it can take six months to a year for a drop (or rise) in current home prices to fully transform into inflation data, economists said.
“It’s not necessarily a particularly accurate indicator of what’s happening in the housing market right now,” said Andrew Hunter, deputy chief US economist at Capital Economics.
Here’s the reason for the delay: The US Bureau of Labor Statistics collects rent data from sample households every six months. The BLS also divides these sample families into six different subgroups (called “panels”) and falters when collecting data for each. According to the BLS, rents for Panel 1 are collected in January and July; Panel 2, in February and August, and so on.
This means that it can take about a year to collect data from all subgroups.
Headline inflation is expected to slow sharply during the second half of the year as the CPI incorporates cooling in home prices, economists said.
“It’s about as certain as you can get, really,” Hunter said.
There’s one more oddity to housing measurement: The BLS tries to assess price changes for homeowners and renters, in a subcategory called “owners’ equivalent rent.”
The measure is essentially a survey reflecting the price homeowners believe they could get if they were to rent out their home. While somewhat tied to market rents, homeowners don’t necessarily feel those inflationary pressures, especially those who own their own homes or have a fixed mortgage, Zandi said.
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Health insurance prices have fallen about 4% a month since October, according to CPI data.
However, consumers’ out-of-pocket costs have not necessarily decreased.
For example, the average person with family insurance coverage through an employer-sponsored health plan saw premiums rise to $509 a month in 2022 from $497 in 2021, according to the Kaiser Family Foundation.
Why the discrepancy?
The government doesn’t calculate health insurance inflation by measuring consumers’ direct costs, such as monthly premiums. It’s hard to gauge the value consumers get for those rewards; costs may rise, but consumers don’t necessarily get more bang for their buck. For example, an increase in premiums may more reflect poorer underlying health of the insured population rather than better insurance benefits.
So, the government instead measures costs indirectly, based in part on the profits of health insurers. Profit margins act as a proxy for consumer prices.
Every single component [of the CPI] it has some idiosyncratic measurement issues.
chief economist of Moody’s Analytics
At the onset of the Covid-19 pandemic, health insurers’ profits soared. Consumers still paid premiums, but were generally not allowed to visit doctors or hospitals for elective procedures.
Now, consumers are using their insurance more often. Insurers’ aggregate profits declined in 2021 compared to 2020 as they paid out more insurance benefits and thus monthly inflation readings turned negative.
The BLS updates its earnings calculations once a year, in October.
Health insurance inflation readings could turn positive in the fall of 2023 and persist into 2024 due to this dynamic, Zandi said. Health care may be among the few consumer categories experiencing higher inflation towards the end of the year, when most other categories have slowed, she said.
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Consumer electronics such as smartphones, TVs and computers were among the few categories to see prices deflate in 2022.
That trend continued in 2023: Smartphone prices fell 20% in the year through April, for example, according to the CPI.
However, the phone’s prices haven’t exactly come down in store.
“The consumer doesn’t necessarily see it,” said Kenneth Kim, senior economist at KPMG. “It seems to them that the price has gone up more and more every year.”
The duality is due to a “hedonic quality adjustment”.
The BLS regulates consumer electronics prices to improve the quality of microchips, software and screen resolution, for example, which gives the illusion of a falling price on paper. The agency does the same for other categories like consumer appliances and apparel.
In other words, consumers get better quality electronics for the price they pay. With the adjustment, prices appear to deflate.
“In that sense, it’s a lower price because you get a lot more value,” Kim said.
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