Despite inflation persisting at nearly twice the Federal Reserve’s maximum target rate of 2%, Moody’s chief economist Mark Zandi has called upon the central bank to slash interest rates. It’s not that the Fed should arbitrarily shift its inflation target and destroy its credibility, Zandi argues, but rather that it should distort its entire measure of that inflation target to declare victory, coincidentally, right before the 2024 election.
Of course, the Fed’s measures aren’t wrong, and even if they were, Zandi’s proposed solution to strip the personal consumption expenditures price index of owner-occupied housing doesn’t give him the desired results he expects. In April, our last measure of the Fed’s preferred inflation measure of personal consumption expenditures price inflation, core services inflation excluding housing on its own still surpassed 3%. And even in May’s mercifully reduced consumer price index print, the Bureau of Labor Statistics found that CPI inflation excluding housing still approached 5%.
Furthermore, Zandi’s main contention, that housing inflation gives disproportionate weight to interest rates themselves by incorporating the added costs of higher mortgages, isn’t actually borne out in the data as evidence that housing inflation numbers are not accurate. In May’s report, “owners’ equivalent rent of primary resident,” or the estimated rental price the owners of a home would list if they were to rent out the home in which they live, rose 0.4% last month, or 5.6% in the past year. “Rent of primary residence,” which is the actual rent that BLS respondents report paying to live in their primary rental residence, rose by 0.3% last month, or 5.3% in the past year. Mortgages may be pushing up the prices paid by owners, but not much more than the actual rate of rental increases paid by renters.
The better reason to ignore Zandi is that he has gotten the worst inflationary crisis in four decades wrong for the past four years. At the end of 2021, just months before inflation was on the cusp of exploding to the double digits while the Fed sat on its hands and kept rates at zero, or negative in real terms, Zandi said inflation would recede with the pandemic, that Biden’s Build Back Better boondoggles wouldn’t stoke further inflation, and that the pandemic-caused inflation was specific to the delta variant of the coronavirus.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
When 2022 proved Zandi false, he said most of the price increases were caused by Russia’s invasion of Ukraine and the pandemic. He said 0% was caused by the 36% increase in the money supply in the mere two years prior. Recall that the godfather of contemporary left-wing classical economics, John Maynard Keynes, said changes to the monetary supply were at least somewhat influential to inflation rates.
May’s CPI print is the first real signal we have that after a long pause in the Fed’s war on inflation, it may finally be recovering some ground in its pathway to 2%. Should we get multiple months of wholesale inflation and PCE following suit, the Fed could finally pivot. But to blame housing on distorting inflation prints isn’t just partisan hackery — it’s also bad economics.