Here's a bold statement: The way we measure inflation might be leading us astray, and it's time to rethink our approach. Governor Miran's speech on the inflation outlook reveals a complex web of factors influencing price movements, and it's not as straightforward as it seems. But here's where it gets controversial: Are tariffs really the main driver of recent goods inflation, or is something else at play? And this is the part most people miss: The way we calculate shelter inflation and portfolio management costs might be skewing our understanding of underlying inflationary pressures.
Let's break it down. When it comes to shelter inflation, Miran highlights that the Personal Consumption Expenditures (PCE) price index, which the Fed targets, includes housing costs for all households. While this captures overall consumer spending, it falls short in reflecting current supply and demand pressures. Here's the kicker: The PCE shelter index lags behind market rents, which means it's more of an echo of past imbalances rather than a real-time indicator. Miran argues that the current elevated shelter inflation readings are a remnant of previous supply-demand mismatches, not current ones. He expects a faster fall in PCE shelter inflation as the catch-up to market rents completes.
Now, onto core nonhousing services inflation. This category, which includes services like childcare, education, and healthcare, has been relatively stable this year. However, Miran points out a critical issue: Not all components of this index are measured through direct transactions. Many are imputed, and this can obscure the true supply-demand dynamics. Take portfolio management services, for instance. The Bureau of Economic Analysis measures these costs based on asset managers' revenues, which are tied to asset values. When the stock market rises, revenues increase, but this is recorded as higher prices, not increased quantity of services consumed. Miran argues that this 'phantom inflation' is misleading and shouldn't influence monetary policy decisions.
Core goods inflation is another puzzle. The common narrative blames U.S. tariff policies for the recent uptick. Miran, however, isn't convinced. He presents several counterarguments: First, the timing of tariff imposition doesn't neatly align with the rise in core goods prices. Second, using product-level estimates of demand and supply elasticities, he shows that exporters bear a significant portion of the tariff burden, not importers. Third, comparing U.S. inflation to other industrialized countries reveals no significant outliers, suggesting tariffs aren't the primary driver.
So, if tariffs aren't the culprit, what is? Miran admits he doesn't have all the answers but offers some possibilities: It could be noise in a volatile series, or perhaps we're still experiencing post-pandemic oscillations. There's also the unsettling idea that goods inflation might be settling at a higher level due to long-term trends like trade restructuring and supply chain resilience concerns.
Policy implications are crucial here. Miran warns against keeping interest rates high based on distorted inflation measures. He advocates for a more nuanced approach, focusing on market-based core inflation, which excludes imputed components and shelter costs. This measure suggests underlying inflation is already near the target. He also emphasizes the risk of labor market deterioration, urging a quicker pace of policy easing to avoid unnecessary job losses.
In conclusion, Miran's speech challenges us to question our assumptions about inflation measurement. It's a call to move beyond simplistic narratives and statistical quirks to understand the true underlying pressures. This isn't just an academic debate; it has real-world consequences for monetary policy and the economy. So, here's a thought-provoking question: Are we chasing the right indicators, or is it time to redefine how we measure inflation to make more informed policy decisions? The comments section is open for your take.
