This morning, however, I’ve changed my thinking. A research piece from Merrill Lynch came across our desk and I was reminded of a piece we wrote back in April, titled, “Obessing the Point“. In it, we argued that inflation would likely come down, and it has since that time. While the current reading rests near the Fed’s comfort zone, I think a quirk in the CPI calculation, which we discussed in that update, will give the Fed what it needs to make a bold move not feel so bold.
As mentioned in that piece, the consumer price index includes a component tied to owner’s equivalent rent, an attempt to quantify the changes in price associated with where we live. Unfortunately, this measure is anything but precise as it is based on a survey of what homeowners believe they might have to pay for their homes on a monthly basis if in fact, they were renters rather than owners. If one substitutes the actual sale of homes in this data for the survey data, the CPI reading falls well below the Fed’s comfort zone.
If the Fed is concerned about actual data rather than guesses, then perhaps they should consider a similar philosophy when looking at the CPI readings. Inflation is not a problem; it is declining and by any measure, likely remains overstated. Second, our economy’s growth is slowing; even unemployment, while still low, picked up recently. And finally, we’ve had a financial crisis which has affected sentiment.
To not ease at this point, would be a mistake. The Fed has everything to gain and nothing to lose.