Every Measure of Real Interest Rates Shows the Fed is Out of Control

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by Mish Shedlock, The Street:

The Fed is out of control. Here are a few charts that show by how much.

Real Interest Rates     

Real interest rates are the difference between measures of inflation and what the interest rate the Fed sets in bank policy.

Rates are at or near record negative levels.

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Three Extreme Measures 

  • CPI: -6.73
  • PCE: -5.65
  • Housing Adjusted CPI: -9.23

Housing Adjusted CPI

Home prices are not in the CPI. In lieu of direct measures of housing prices, the BLS uses Owners’ Equivalent Rent (OER).

OER is the single largest component in the CPI with a weight of 24.26%.

I calculate a housing-adjusted CPI by substituting the Case-Shiller National Home index for OER.

The latest Case-Shiller data is for October.

CS National , Top 10 Metro, CPI, OER, Percent Change 

CS National Top 10 Metro CPI OER 2021-10

Percent Changes Year-Over-Year (October)

  • Case Shiller National: 19.07%
  • Case Shiller 10-City: 17.04%
  • CPI: 6.22%
  • OER: 3.13%
  • Primary Rent: 2.70%

Whereas national home prices are up 19.07% (down from a record 19.96% two months ago), OER is up a mere 3.13%

Case-Shiller Home Price Index 

Case-Shiller Home Price Index Top 10 2021-10

Huge Disconnect 

CS National Top 10 Metro CPI OER INDEX 2021-10

Economists vs Human Beings

The average person would look at the above home price charts and scream “Inflation”. In contrast, the average economist sees nothing at all.

The distinction comes about because homes are allegedly not a consumer item. Martians buy them.

More accurately, the average economist considers homes a capital expense that has nothing at all to do with inflation.

I understand the economists’ point of view, but I am concerned with “inflation” not alleged “consumer inflation”.

Do Housing Prices Belong in the CPI?

A housing-adjusted CPI is not a perfect measure of inflation and it may not even be a good one.

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