US inflation rate is declining – no case for further rate rises

It’s Wednesday and I have comments on a few items today. I haven’t been able to write much today because the power has been down after the dramatic storms yesterday in Victoria damaged the network and caused absolute chaos (see below). Power is mostly back on now (which is why this post is later than usual). The US CPI data released yesterday showed that inflation continues to decline and the so-called ‘surprise’ that seems to have shocked the ‘markets’ are mostly down to the eccentric way the US Bureau of Labor Statistics calculates housing costs. The data provides no justification for further rate hikes in the US or anywhere else for that matter. I also report on an interesting survey from Japan regarding local attitudes to foreigners. I don’t think it reflects Japanese insularity although many will conclude otherwise. Then some Wayne Shorter.

US inflation data – in line with the transient narrative

Once the Internet was back up today, I saw lurid headlines reporting how financial markets were ‘shocked’ by the latest US CPI data released by the Bureau of Labor Statistics overnight (February 13, 2024) – Consumer Price Index Summary – January 2024.

The BLS reported that:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in January on a seasonally adjusted basis, after rising 0.2 percent in December …

The index for shelter continued to rise in January, increasing 0.6 percent and contributing over two thirds of the monthly all items increase …

The all items index rose 3.1 percent for the 12 months ending January, a smaller increase than the 3.4-percent increase for the 12 months ending December.

If you understand the eccentric way the BLS calculate the CPI movements in relation to ‘shelter’ then the January result is no surprise.

Housing (in BLS speak – shelter) represents about one-third of the total basket weight of the goods and services that are included in the CPI.

So movements in ‘shelter’ always significantly influence the overall CPI outcome.

However, calculating the shifts in housing costs is not easy.

This explanatory note – Measuring Price Change in the CPI: Rent and Rental Equivalence – explains how the BLS simplifies the calculation of movements in housing costs.

The BLS consider the ” shelter service that a housing unit provides to its occupants is the relevant consumption item for the CPI”.

For “renter-occupied housing”, it is the rent paid that reflects the “cost of housing”.

However, in the case of owner-occupied housing:

… most of the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes, without furnishings or utilities

So the BLS does not attempt to estimate the value of the housing units but instead calculates what it calls the Owners’ Equivalent Rent (OER), which is simply how much it would cost to rent that property.

The point I am making here is that rental charges always lag other cost movements and interest rate increases.

So what is flowing through the CPI now as the general CPI drivers are abating due to the resolution of the supply-side issues arising first from the pandemic and then the Ukraine situation, are these lagged rental effects.

They will wash out in the coming months.

The commentators who are now demanding the US Federal Reserve further hike rates are missing the point.

I also note commentators in Australia are claiming this means the RBA should consider higher rates at its next meeting.

There is zero case for that and the eccentric way that the BLS calculate housing costs in the CPI do not carry over to our data.

The overall message today is that US inflation continues to fall and at 3.1 per cent is hardly out of control.

Climate chaos

Victoria, Australia was hit by one of the most severe storms in history yesterday, which caused widespread blackouts, some of which are still not remedied.

Victoria’s largest remaining coal-fired power station, which still supplies about 67 per cent of power was forced to shut down as the demand dramatically exceeded supply.

Hundreds if not thousands of power poles collapsed, high power towers broke in half and more than 1.5 million people were left without power.

Transport systems were in chaos as was the mobile phone network.

Petrol stations were shut, shopping centres unable to continue and the financial system – consumer banking stopped.

It was a demonstration of how reliant we are these days on networks.

The Internet is patchy today where I am working and so I won’t be able to post very much.

As a result of solar and battery storage my office has continued power.

The electricity sector is in the hands of the private sector after the foolish privatisations in the 1980s and beyond.

It is undeniable that the frequency of these high impact damaging storms is increasing.

It should now be obvious that the infrastructure is becoming unfit for purpose as it is being increasingly tested by these storms.

There is a chronic underinvestment in that infrastructure by private companies who target short-term profits over continuity and reliability of supply.

I also note today that temperatures in Japan which is still in Winter are very warm – unseasonably so.

Tokyo will see temperatures rise above 20 degrees Celsius this weekand down south in Kyushi, it seems like Summer is here already.

Japan – Open to foreigners?

When we are living in Kyoto, we live in the suburbs in the north east area near the University, which is far from the tourist areas that are swamped by visitors.

The people in the neighbourhood are mostly really nice to us and greet us each day in the same way anyone would.

Some even engage in conversation even though our Japanese is, in their eyes, defective (but I am working on that).

The local bakers are really nice to us.

So I was interested in the results of a survey conducted by the Regional Planning Research Institute at Taisho University in Tokyo that showed that (translated text):

Survey of residents in municipalities with high concentrations of foreigners in regional areas – 84% of residents have no contact with foreigners in municipalities where 1 in 20 or more residents are foreigners.

Two of the challenges facing Japan are:

1. Overcrowded major cities that are vulnerable to massive damage when earthquakes occur – so there is a need for a meaningful decentralisation strategy.

However, that is hampered by poor regional public transport networks.

Japan has excellent public transport down the ‘spine’ but lateral capacity into the regions is not as good.

Further, decentralisation strategies require resilient communities, capable of maintaining social stability in the face of shifting demographics.

This survey bears on that last issue.

2. The ageing workforce and declining population overall is creating shortages in particular sectors and regions.

Some regions are hollowing out demographically as younger workers leave for better employment opportunities in the cities.

The Japanese government is (consistent with the decentralisation strategy) desiring more open regional communities but also is keen to permit foreigners into the workforce to fill skill gaps.

The survey thus provides very timely information about how accepting the regional areas are to new foreign workers.

The survey covered 59 cities, where foreigners account for 5 or more per cent of the population and avoided the 23 wards in central Tokyo and the 20 designated major cities.

If you read Japanese, here is the – Final Report.

When the respondents were asked “Do you want the number of foreigners living in Japan to continue to increase?”, 54.3 per cent said no.

65.9 per cent said that they were against further foreigners living in their community because they believed “There is a risk of more troubles due to differences in culture and lifestyle habits”.

A high proportion of respondents also said that “There is a risk of worsening security”.

However, many respondents understood that labour shortages needed to be resolved and were open to ‘local globalisation’.

Many foreigners will read that report and conclude that Japan remains a very insular society that is hostile to outsiders.

However, when I reflect on similar types of research that has been conducted in Australia, the responses are not too dissimilar, which means that generalisations about insularity or otherwise are dangerous.

Local communities around the world want to hang on to their traditions and customs and worry if they are being threatened by those from the outside who lack understanding.

In Australia, migrants who cannot speak English are at a major disadvantage in the labour market.

That is no different to being in Japan without the language.

Music – Juju

This is what I have been listening to while working this morning.

I am still unpacking boxes after moving house late last year and today I dug out an old Blue Note album – JuJu – by tenor saxophone player – Wayne Shorter – that was released in 1964.

I haven’t listened to it for a long time.

This was one of the Blue Note albums he recorded as side project while working in the Miles Davis Quintet (between 1964 and 1970).

For the technically-minded readers, this album marked his penchant for moving between tonal and modal patterns, which marked a break from the Bebop era of the 1950s and synthesised the earlier forms into a very contemporary sound at that time.

The other players are:

1. McCoy Tyner – piano.

2. Reggie Workman – bass.

3. Elvin Jones – drums.

Only Reggie Workman is still alive.

Here is the title track, which was composed by Wayne Shorter.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.

This Post Has 4 Comments

  1. What they call “inflation” we can call it a massive bail out to banks at the expenses of the middle-classes.
    Maybe that charging the low-income classes is a way of saying to the elites: cool off you guys, we’re getting them to pay for the crisis and maybe we’ll bypass it, as usual.
    2008 was not as usual, but 10 years of cheap credit was intended to recover the lost assets of the elites, and so the colossal real-estate bubble and so the inflation.
    I read somewhere, on the ocasion of the 25th anniversary of the euro that “(…) the vast majority of Europe’s banks should simply no longer exist. Their underlying assets are worth more than the price put on them by the stock market as corporations. They should be broken up and sold off.”.
    The US banks are somehow better than their european counterparts, but panic may come in the early morning, one of these days.
    Just like last spring, when Silicon Valley Bank, First Republic Bank and Signature Bank went down the drain.

  2. I live in New Mexico, and the most prominent brand of racism I run into is from those who consider themselves “native New Mexicans,” as in descendants of the Spanish conquistadors who lived in the territory now called New Mexico, toward Mexican immigrants, as in descendants of the Spanish conquistadors who lived in the territory now called Mexico. What’s even more surreal is, I know a guy who considers himself a native New Mexican, is poor, asks me why I’m learning Spanish (he speaks Spanish himself), and is a huge Trump supporter. Presumably he’s going under the belief that other Trump supporters will be sensitive to the very particular racial line he’s drawing based on where people’s ancestors lived prior to Polk’s War.

    Point being, racism is just weird.

  3. The headline could be worded differently. To say “no further” almost implies the rate increases were necessary at one time; which they were not.
    Bill, here in the US we are bombarded with news and opinions about the $34 trillion national debt and Social Security going bankrupt. Why do you think it is so hard to get through to people about the workings of a fiat money system? Do you have these problems when you give lectures? I am beginning to understand how Galileo must have felt trying to explain heliocentric theory.

  4. Mark—

    The funny thing about heliocentrism is, Galileo, Copernicus, and Kepler pushed it despite not having an answer to the most important problem: if the Earth orbits the Sun, why don’t the background stars move throughout the year? Of course they do, but the annual movement in the sky of even the second-closest star is about the same size as looking at a dime from about four miles away. Then on the other hand, Galileo used a moving Earth to say that the tides were caused by the oceans sloshing around, which also isn’t true. Even more ironically, under the concepts of relativity that Galileo himself put forward, neither heliocentrism nor geocentrism are true, because there are no privileged reference frames.

    I think talking about MMT comes across the same as talking about flat Earth. After all, why do you believe in heliocentrism? Bill might bring up how you can fly from Australia to Chile without going over the Arctic Sea which, fair enough. Bill is perhaps more likely to point out that he’s seen a Foucault’s pendulum in his life. But if you’re a yokel living in America who’s never flown in the southern hemisphere and doesn’t read Umberto Eco? The answer basically comes down to, you believe in round Earth and heliocentrism because that’s the way the Earth and Sun are talked about by people who seem to know what they’re talking about.

    The MMT debate is interesting because its researchers are doing this public outreach for what would ordinarily be a series of schisms in the academic literature that resolve themselves through retirements and funerals. But on the other hand, wealthy donors subsidize universities, and they have their own agendas; and federal, state, and local governments subsidize universities, and they have their own agendas; and journalists ask academic economists for their opinions on public policy issues, which feeds back on the first two.

    So it’s fair game, involving the public in this particular academic debate, but it probably isn’t worth having explicit arguments about it. If anything—the real heart of MMT is that it’s resources, not money, that limit what we can do. So just reframe any economic discussions away from money and toward resources. “Oh man, Social Security is gonna collapse? Is it gonna be like Children of Men, there are just no young people left?”

    As a final note, Galileo was a dick, and he was persecuted because he called the pope an idiot.

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