Even though inflation has reached 40-year highs, topping out at 8.6 percent for the month of May, some took minor solace in the fact that prices haven’t increased at the rates seen during the Jimmy Carter era. But one influential analyst thinks that solving skyrocketing prices will require nearly as much effort—and quite possibly, economic pain—as breaking the back of inflation did during the 1970s and early 1980s.
Former Treasury Secretary and longtime Democrat Larry Summers recently co-authored an important paper analyzing long-term inflation trends and statistics. The paper demonstrates that changes to the way the federal government measures inflation via the Consumer Price Index since the Carter era understate the current scope of the problem—and the challenge the Federal Reserve faces in getting inflation under control today.
Two changes to the inflation measure—one a one-time methodological change, and the other a long-running trend—explain much of the apparent difference in CPI rates between the late 1970s and today. The first comes from a 1983 move by the Bureau of Labor Statistics to remove homeownership costs from the CPI measurement and replace them with a metric called owners’ equivalent rent.
The new metric quantifies what homeowners would receive for their homes on the rental market. As one might expect, the metric closely tracks the rental market. (Rent is a separate component of the CPI.) Most importantly, shifting from homeownership costs to owners’ equivalent rent to calculate homeownership costs eliminated the direct effect of mortgage rates—and therefore interest rate policy—on calculating the rate of inflation.
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04.25.2024