The Number Nobody Pays: How Phantom Rent Runs the Economy

The Bureau of Labor Statistics rec released a July Consumer Price Index

on August twelfth, which is the day that we're recording this at 8

30 in the morning. The headline number came in at 3.4% year over year inflation.

Core CPI, excluding food and energy,

hit two point five percent. Markets moved.

The Federal Reserve was watching.

Or at least that's what we're supposed to believe.

But here's what

made the number actually interesting.

Nearly two thirds of that monthly increase came from one category shelter,

not gas, not groceries, shelter.

A single component of the index accounted for the bulk of the signal

the Fed is using to decide whether you can afford to borrow money,

whether your paycheck needs to stretch further,

whether the economy is running too hot or too cold or on the process of cooling.

Except shelter in the CPI isn't measured the way you pay for shelter.

It's not your mortgage. It's not your actual rent cost.

It's something called owner's equivalent rent.

A hypothetical number that represents the rent homeowners think they could charge

themselves if they rented their own house to themselves.

Number one actually pays it.

The Fed watches this one number.

Your rent is

And your mortgage bill lives somewhere else entirely.

Hey there, I am Joshua.

And I'm Will.

And this is the overlap. Will's back,

you guys.

We're glad to be back, Joshua.

Thank you.

Glad to be with ya. Why don't you tell the our our guests,

our wonderful audience, our beloved,

esteemed, good looking, talented audience what we're talking about today.

Well as you probably heard in the intro,

we're talking today about the CPI,

or consumer price index report that landed this morning,

and why the inflation number everyone heard isn't actually the number that's driving

policy.

Right. So yesterday, like I said at the at the the intro,

the Bureau of Labor Statistics puts out July's inflation data three point four

percent year over year. That's the headline that everyone saw.

But if you actually look at what moved that number and like actually look at it,

it's not just the press release.

You find something pretty crazy about how the government measures inflation.

And how far that measurement has actually drifted from what people

are really feeling?

And why does this matter beyond just being a data nerd complaint?

Because the Federal Reserve uses that number,

or at least some version of this number that we're not allowed to know,

like a credit score, to decide what interest rates look like.

And that decision ripples through everything.

Your mortgage rate, your credit cards,

your car loans, whether employees are our employers,

sorry, are hiring, whether they're they're cutting jobs,

they're laying people off. It all traces back to how they're measuring inflation.

And the way they're measuring it is to be

charitable I guess, not connected to how any of us actually live.

Surprise, surprise. But you mean this is like the number that will help determine

when you go to the grocery store and everything's ten percent more expensive than

last month, but the government says inflation has eased?

Exactly that. And we talked about it in it last episode actually.

If you if you didn't listen to it,

go back and listen to the episode ~ talking about democratic socialism.

But it this is kind of a a specific reason that shelter is measured the

way that it is. And it really goes back about forty years.

It always goes back forty years because that's what we do,

right? We connect things that are happening now to things that happened in the past.

And there's a specific reason that the Federal Reserve is using a different

inflation metric than the one everyone actually talks about.

And that's kind of deliberate too.

And and both of these things are sitting on top of each other right now

in a way that makes the official story and the kind of lived experience really

incomprehensible to each other.

Well it's a good thing we're here to pull that apart.

Right, exactly. So before we were even born in 1983,

before I was born. Well, you were born before then,

Hm. Ancient times. Ancient times.

right? 82. Back in the day. It was a Tuesday.

Yes. It was a harsh life.

But no, in in 1983, the Bureau of Labor Statistics made a decision about

how to measure housing costs inside the consumer price index.

Now, if you don't know what the consumer price index is.

at the time the way they did it was kind of straightforward.

They just measured the actual home sale prices and you wanted

to know what homeownership cost.

You you tracked that, like what people paid for houses,

which makes sense, right? It sounds like the most obvious way to measure

the cost of housing.

So of course they stopped doing it that way.

Right, and for very different reasons.

So they did stop doing that. They they switched to something called

the owner's equivalent rent. The idea is that instead of measuring what

a house actually costs, you measure what that house would cost to rent

if the owner rented it out for the price

Yeah.

that they felt was reasonable.

I I don't even know how they measure this,

but then you're basically comparing the cost of owning to the cost of renting.

And you're measuring the difference.

So in theory, if owning a house becomes more expensive relative to renting,

owners would start selling and landlording those houses out,

which would theoretically drive equilibrium.

It's not exactly an elegant theory,

but it is a theory.

Right, but nobody actually pays the owner's equivalent rent,

right? I mean we're talking about a hypothetical number.

It's it's it's this seems pretty far removed from reality.

Exactly,

because i it's supposed to be some sort of balance.

But number one, i it's hypothetical,

right? It's a number constructed from surveys where they ask people

who actually own homes what they think their house would rent for.

Gabriel Chottero Reich at Harvard has done a lot of research on this.

He he found that the the BLS, that's the Bureau of Labor Statistics

for those TLA people out there,

three letter acronyms, it's constructing

A phantom rent that doesn't actually exist anywhere in our actual economy.

So your mortgage payment doesn't actually get measured,

even though it should be. Your property taxes don't actually get measured,

and let's be honest, it really should be.

The actual price you paid for your house doesn't even get measured.

What gets measured is a survey that respondents guess about

a hypothetical rental situation that will never actually happen because they live

in the house.

Not to mention that people are often deluded about what their property

is worth or what their things would be worth to someone else.

~

exactly.

in all sorts of directions. But why why would they do this?

Yeah. The official reason that they give is that it gives you

a measure that's comparable between renters and owners.

Does that sound confusing? Because it feels confusing.

It's yeah.

So ~

a renter pays rent. An owner,

in this this wonderful, beautiful fairy tale logic,

should be treated as someone paying themselves rent.

It kind of

smooths out the volatility of actual home sale prices,

which do in fact swing very widely.

If you've ever bought or purchased a home or sold

Yeah.

a home or were trying to purchase a home,

you know that the numbers just don't seem connected to reality.

Right.

It gives you something more kind of stable,

I guess, to put inside of an index,

which that's the goal of an index.

It's like an average. And honestly,

for a certain kind of economist,

and they're sure there's at least one of you listening out there,

it feels more theoretically pure.

You're not really measuring asset prices,

you're measuring the service of housing,

like the actual roof over your head.

But first of all, let me just say when you s when you use the word smooth

out like volatility, ~ thanks in no small part to this podcast,

~ alarm bells go off in my head,

like why would they be smoothing that out?

Like what who else stands to gain from that?

But I have a different a little bit different question.

If home prices spike and the Fed wants to know whether inflation

is happening in housing, they're not gonna see it under this new model,

right?

Right, they're

not and and I do wanna be ~ I wanna be ~ not just honest but like give give true

accounts for for someone who who crunches data,

right, and is not necessarily worried about about the actual outcomes

of lives and the the feelings and the people who live in the

the numbers that they're talking about.

It makes it easier to compute because otherwise it just it's just th you

can draw a line through all of the data and you try to find the mean in all of it.

It it just makes it easier.

To give real world results. Now,

you know, mathematically, I think of this like code and I think of it in functions.

And I'm like, well, that just means that the answer is not a number,

it's a function, and and we should be okay with that.

But this helps put it into more of a of a an average that they can

use and benchmark even if it's n not necessarily accurate.

And

They wouldn't see it the way you'd necessarily experience it,

right? In in nineteen eighty three when they made this switch,

home prices were crazy volatile.

Like inflation was crazy volatile.

~ my my mother in law worked at the time in in home loan mortgaging

and

the there were there were double digit numbers on interest rates at the time.

And so they're like she has old forms that would have,

you know, two two places for the interest rate.

~ whereas you know in our adulthood coming up,

we've never really seen double digit interest rates on mortgages,

especially. ~

Mm-hmm.

it's usually been confined to single digit rates.

It's something to seven to eight percent was the average when I first entered into

the housing market. ~ but you know that's that's neither here or there.

I I kind of get why they wanted something stable.

But by switching from the prices to this constructed rent,

they basically created a measurement that lags behind reality.

So if if real housing costs go up,

which if you own a home, the things that go up are your you know,

your not your mortgage, your mortgage is fixed,

but your insurance goes up and your your insurance goes up and your taxes

go up and and all of those things mean that you're actually paying more month

to month, regardless of the fact that your mortgage isn't changing.

But if

Based on surveys and like lagging data and models,

that's what actually gets to the important part,

right? Like housing got expensive.

Very expensive, and it continues to get higher month to month.

But the CPI shelter component keeps kind

of roughing over,

sandpaper, if you will, ~ that reality with a number that nobody actually pays,

it disconnects itself from reality.

And that's been the status quo for roughly forty years.

~ gross. ~ that because that was just one year before I was born.

Well, yes. ~ for forty years the the main measure of inflation that the

Fed and the public both use has a built in lag

on the biggest expense most individual human beings have in the United States.

And really no one talks about it because it's technical,

right? It's buried

In the methodology, in the formula,

because the alternative sounds more elegant,

but only in theory and only if you're good at math.

Right, and as you mentioned, when you're living in the mathematical abstract world,

this seems like a lot easier to compute,

but when actual people are depending on the the numbers and what they imply,

there's a cost, practical cost to this,

right?

Yes,

that's exactly right. It costs something in the practice of it.

Because shelter is now about thirty five percent of the the CPI basket,

like the entirety of the consumer price index,

thirty five percent of it, that's more than a third,

is the single biggest weight of the average person's burden.

And if that weight is systematically understating the actual costs of housing.

Then the entire index is undershooting the inflation that people

are actually feeling.

Right, so this methodological choice they've made,

~ which is to measure something that doesn't actually exist,

~ now that we've had it for forty years,

there must be some kind of consequences we can point to and see how

it affected real people, for better or worse.

Yeah, it i it it has

for sure, it has had consequences.

And they actually got worse in nineteen ninety six.

~ the Senate Finance Committee commissioned a study on whether

the consumer price index was overstating inflation.

It was called the Boskin Commission,

named after the chair, Michael Boskin.

Their their ultimate conclusion was pretty direct.

The CPI overstates inflation by about one point one percentage points per year.

It's not a tiny amount when you're talking about a an average of

a three percent annual. Like that's more than a third.

Again. ~ we're talking ~ about a third of of headline inflation just being

incorrect, being wrong.

And what did they base that conclusion on?

They looked at the at substitution bias.

It's the idea that when prices go up,

people buy different things, cheaper things.

And the the index doesn't fully account for any of that.

They looked at the hedonic quality adjustments.

The idea that when a product gets better,

its price increases isn't really an increase because you're getting something

better. ~ to kind of restate that,

they looked at at outlet substitution.

This idea that people switch

where they shop. They go from Target to Walmart.

They go from ~ JCPenney to TJ Maxx,

right? Like they all of these things are defensible in theory.

The problem is that the commission used these ideas to justify new methodologies,

new calculations, new ways of coming to these numbers.

And those methodologies, once they were adopted,

had a direct

Policy consequence.

I could guess that whether that's a good or bad consequence,

but I'll just let you tell us.

Which was it?

Yeah, I mean it

it's almost never good for the average person,

right?

Right.

Co cost of living adjustments for Social Security,

colas, the way which is what the way cost of living adjustments,

the way that social security payments adjust every year,

is directly tied to the consumer price index.

So if the consumer price index is wrong by one point one percentage points,

then Social Security is paying out one point one percentage points more.

Than the government thinks that it should.

It's almost never that direction.

It's usually it's paying out less

Right.

than people actually need. So if the Boschian Commission was right that

the CPI was overstating inflation by 1.1 percentage points,

then reducing that overstatement means reducing Social Secures.

Which is a nice way of saying we re have to reduce.

The Social Security payments that people have grown accustomed to receiving.

So the Commission's own projections basically said the changes they recommended

would cut $148 billion in deficit spending and six hundred

and ninety-one billion dollars,

blah blah blah billion, off of the national debt by two thousand six.

Now that's real money. Those are real people's benefits.

So this measurement change that they came up with now has had

a direct physical consequence,

basically. Yeah.

And it still it still does, directly.

Like

it was not an abstract debate about how it was done.

And this was a commissioned study that concluded the government

was overpaying retirees because the inflation measurement was wrong.

And their conclusion led to policy changes that reduced the amount that retirees

got. Now some of those changes were reasonable.

Don't cut my head off here. But substitution bias is real.

You do change what you buy, right?

You don't buy if if you know ground beef goes up like it's been going

up lately to nine dollars a pound,

you're gonna switch to ground pork.

That's still currently sitting at about what beef was before Donald Trump

was elected. So maybe ~ I don't know,

~ inside the commission, go ahead.

But

sorry I was gonna say I mean these that sounds reasonable,

but then these numbers are just kinda like living in people's heads.

There's no way unless you can interview everybody at every checkout line

to figure out, you know, why are you buying pork?

Did you switch from from from beef to pork because of

The costs or health reasons or because,

you know, whatever. You you you left your Judais Judaism faith.

I mean whatever. ~

Right.

you know, like what what's going on here?

And we have to imagine that we can summarize that,

but it just seems like it's depending on a lot of stuff that's not really there's

no way to verify or refute, right?

It is. I

it's absolutely doing that. And it's not something that is truly data if

it r relies upon volunteers submitting information willingly.

Right? Like you might not actually think about the fact that you're switching

to pork, but when you're

Right.

sitting there looking at the price tag and you're going,

Why is it like eleven dollars more than it was three months ago for the same amount?

I'm gonna go to the one that's closer to the price because we we fixate

on on the actual amount that it costs.

Rather than

Hm.

the reasoning behind why we're doing it.

It happens so innately that we don't really think about it.

We're like, well, I mean it's it's meat,

it's right next to it. I'm not Jewish.

Like, you know, like I I'll substitute that.

Yeah. So even inside the commission there w they were kind of upset about this.

They was they were disagreeing about it.

Robert Gordon, who was the ~ just one of the members of this commission,

said that the bias estimate should have been higher,

not lower. Meaning maybe one point two to one point three percent,

not one point one. And then Dean Baker at the Economic Policy Institute,

he looked at the evidence and said it was largely speculative.

Guesswork rather than careful research,

and that the Commission had failed to make a compelling case that

the adjustments were justified.

So they did a study to justify policy outcome?

~ yeah, kinda. another reason is that they genuinely believed and and

I I do believe this, I think they believed that the consumer price index

was overestimating inflation. But they were very much less careful about

the evidence than they probably should have been.

They didn't use really it necessarily the scientific method.

But either way, the outcome was the same.

They changed the way that it was calculated in a way that conveniently reduced

What the government had to pay out.

And that change is now baked into how we measure inflation.

And that was nineteen ninety six,

that's almost thirty years ago.

And we're still living with the consequences of that choice.

So you've got the nineteen eighty three decision to use something that nobody pays

for, and then the nineteen ninety-six decision to adjust the methodology

to suggest that inflation is lower than people think it is.

Right. And that that was just then.

We'll get a little bit in into what's happened over the past,

you know, year and a half or so.

Two almost two. I don't hard to tell at this point.

Two deliberate choices, right?

One was building on the other.

Both with technical justifications,

both had the practical effect of making the official inflation number lower than

lived and experienced inflation.

But both of them were sitting too much.

Inside the structure where measurement sounds neutral and scientific,

like a tape measure. You know,

you you didn't say, Hey, go measure that symbol,

right, over there and and tell me how wide it is,

and you look at it and you go,

Well, it's eight inches. It that feels objective.

But when you have to measure it in millimeters and you tell me it's eight inches,

I can convert that. But if you need a whole number,

you know, you want to know how many inches it was,

it it doesn't really work out that way.

But the policy consequence is that people who were on a fixed income,

like retirees, but also people who are just working everyday jobs,

whose income is tied to inflation adjustments,

they just get less money.

So in December of twenty twelve,

the Federal Open Market Committee made another decision.

They officially adopted the personal consumption expenditure price index.

And look, the this is term heavy.

This is definitely a term heavy episode.

PCE is what they called it as their preferred measure for the

two percent inflation target, not CPI.

PCE. The one to

The one on one hears about on the news,

right? So the the word you actually hear about on the news is CPI,

PCE. ~ You have to figure it out.

So what's the the difference?

So the PCE and CPI basically measure the same thing,

right? Inflation. And that's what they're trying to do.

But they do it in different ways.

They they actually obtain the information and calculate it differently.

It's a different basket of goods,

different weightings, different calculations.

The Fed says that PCE is more comprehensive,

that it captures the actual pattern of what people spend money on more accurately.

And look.

There are reasonable technical arguments in that direction.

But what actually matters is that PCE is consistently lower than

the consumer price index, and not by a tiny amount.

By enough that we're at two percent of inflation sounds a lot different from we're

at two point five percent inflation.

So the Fed is targeting a different number than what people hear.

Yes, mostly, but they're targeting a different number than what people hear

in a way that changes the public debate about inflation and what it's anchored

on to the number that the Fed isn't actually using anymore.

So imagine if the Fed were keeping ~ the economy at two percent unemployment,

okay? And then they measured unemployment using a completely different calculation.

That only counted employed people who also worked overtime.

And then they just never explained that to anybody.

And then they made policy based on the second number while Congress

and the news talked about the first number.

That's what's happened.

And in that situation people would think they're insane or going insane because

the official number and their actual lives don't match up anymore.

Yeah, and that's a that's a lot of what happened at the ~ toward the

end of of Biden's term in the same kind of concept.

You know, they they kept telling us like,

no, everything's improving, the numbers are getting better,

everything's cheaper. And when we actually went to the grocery store,

when we actually went places to do things and get the very things that

we need to live and survive, it didn't really add up.

They're not going insane necessarily,

d just the numbers don't match up because they're they're literally measuring

different things.

So today, the the twelfth, the Bureau of Labor Statistics released the July CPI.

And the headline is three point four percent with the core at

two point five percent. But the Fed's looking at that price pricing consumer

equivalent, which probably came in lower.

But that's not gonna make a headline.

And that's not a detail at all.

That's kind of the whole reason the Fed decided not to move rates

on july twenty ninth.

And held rates at three point five to three point seven five percent.

And if memory serves that was a tight vote,

wasn't it?

Nine nine to three, I mean three members dissented.

They wanted higher rates. The dissent isn't usually that visible,

but it was this time. And I know you well enough to know that your next question

is going to be why? Because even within the Fed,

there's a lot of disagreement about whether that number,

right, the PCE number that they're actually looking at,

is actually telling them what they need to know about inflation right now.

Is inflation really cooling or are the metrics they've chosen just

not seeing something that's really happening?

And meanwhile the CPI number, the one everyone's talking about,

is showing shelter up three point four percent year over year,

and it drove nearly two third of two thirds of the monthly increase.

Exactly. It it drove two thirds.

So when people see three point four,

they might think, okay, inflation's spread around,

but it's not. It's concentrated in the one cost that none of us can actually escape.

And that concentration showing up in the number that the public's debating about

is not the number the Fed's using to make decisions.

So why does shelters stay that elevated if the housing market's cooled off?

Now we're gonna introduce another three letter acronym.

That's because the OER is lagging.

Okay. That's what we're missing.

So it's based on

right. O OER, of course. So it's based on survey data.

Yes, actual housing sales have cooled,

but the surveys are slow to catch up because rental surveys take time.

The data looks back. So you get this ghost of

of housing's past inflation.

kind of baked into the index even after the markets started to move.

And the Fed is looking at PCE,

which probably doesn't weight shelter as heavily.

So they see it cooling. The num the public sees the CPI headline and thinks it's

not cooling. And both are looking at their number and thinking that the other

one is crazy.

And then there's the actual problem of data collection breaking down.

Yeah. So in October of twenty twenty five,

the government shut down. Not metaphorically it shut down,

and the Bureau of Labor Statistics,

which produces the CPI, is a government agency.

Their staff were furloughed, they stopped collecting data,

and when they came back and tried to put it together,

the shelter component of the CPI or the housing,

maybe we should just call it housing,

but the housing component of the CPI for that period.

Had a massive data gap. There just wasn't any.

So they couldn't actually survey people.

They were not literally allowed to show up to work.

So they couldn't get new rental information.

So they made a decision. They carried forward the previous month's housing estimate.

And then they froze it in place,

which assumed a 0% change in housing inflation for that shutdown period.

So they just filled the hole in the data by keeping the number the same

for the previous month or previous ~ report.

Exactly. And that's not great.

So Jason

No.

Furman, who's at Harvard now, he actually used to chair the Council

on Economic Advisors under President Obama.

He looked at that and called it a big judgment error.

I mean, I would too. But he said the the carry forward methodology probably

understated housing inflation by point three to six percentage points year over year

during that period of time. That's not trivial.

Because housing is a third of the consumer price index.

So if if shelter if shelter or housing is undercounted by a half

of a percentage point, that spreads through the whole index.

Which ~ breaks the measurement system itself.

It's broke. And kind of more than that.

When the government shuts down,

you get this weird waterfall where the data stops,

the analysis stops, and then you've got to fill in the gaps with assumptions.

And those assumptions are baked into the official number that people

see and that the Fed is supposed to be using.

Except the Fed is using the PCE,

which has its own separate calculation.

So

Who knows whether their number got affected the same way or not?

This is insane.

It is. It's a measurement system that's pretty much already laggy,

right? Like it's already using hypothetical numbers instead of the ones that we're

seeing right now, because that's just how data works.

It has to be collected. So now it's also vulnerable

to government shutdowns literally breaking the pipeline of information.

It's not like, you know, it it's just a log that pushes into

a database somewhere and and when people aren't at work it just keeps pushing.

It it just breaks and there's just no information.

And the only reason people even know about this is because Furman actually published

a note about it. It's not in the official CPI release,

it's not flagged, there's no blaring alarm.

You just have to go digging to find out the the consumer price index you're looking

at has a little star next to it saying that the housing component

was estimated because the government didn't exist during that period of time.

So let's talk about what we need to know at this point.

what I want to know is you go to the grocery store,

you know what you spent last summer,

you know what you spent last month,

and the government tells you food inflation is two point seven percent year over

year.

And you know that that's not what you're actually paying for at the register.

Right, I know it. Everyone knows it.

So where is the two point seven percent coming from?

Coming from a different calculator,

a different sample, a different basket.

It's it's food at home inflation specifically,

which the Bureau of Labor Statistics measures using a specific approach.

But researchers have looked at this.

They've asked consumers how much they think grocery prices have gone up.

Now, Pew Research found that the median consumer thinks grocery inflation

is somewhere between 3.9%.

and five point four percent, not two point seven.

And that gap is consistent in perpet perpetuity for all of time.

It keeps showing up. People think inflation is higher than the actual number says

it is.

And that's a two to three percent percentage point gap.

On the low end of what people report.

And here's the thing about that number.

It's not that people are bad at math.

A lot of people are. It's that the official number is using

a statistics approach that doesn't actually match how people actually shop.

The CPI uses a fixed basket of items.

Your spending patterns change,

right? Like you stop buying the expensive thing,

you buy the store brand instead,

you buy less. The index, say butter went up 20%,

but you switch to a different

product that only went up ten percent.

So the index says your cost went up less than it actually did.

Your lived experience is you're paying more for less like actual item,

but the measurement smooths out over the substitution effect.

The metric is built to absorb your adaptation.

Right. And then on top of that,

the BLS measures food at home completely separate as from food away from home.

So if you're eating at a restaurant or a takeout,

that's in a completely different bucket,

completely different category.

When you're actually budgeting,

you're thinking about feeding yourself.

Like that's it. You're like food in my belle.

The index is splitting three ways though.

And the result is that housing

which is thirty five percent of that,

is measured with a phantom rent number no one actually pays.

And food, which is actually hitting people the hardest,

is measured with a calculation that assumes that you never change your consumption

pattern and you never eat out.

official grocery number since twenty fifteen,

and think about that time window,

that's when smartphones became,

you know, necessary and when housing got really expensive in most cities,

when everything kind of tightened up,

grocery prices are up thirty six point nine percent since twenty fifteen.

Since twenty twenty, they're up twenty five point two percent.

That's right at that inflation time,

that pandemic time, and the official CPI food number is two point seven percent.

That disconnect is not small. That's not like a measurement error within

a reasonable window. That is a structural error.

And the person who goes to the store every week is experiencing

the twenty five percent and not experiencing the two point seven percent.

No, they're not. And that's not hypothetical.

Like there's a federal employee named Chris Myers in Kansas City.

He's a federal employee that used to co own crane brewing.

During the October shutdown, he lost his paycheck,

no income. His family was already on a tight budget,

but once that shutdown hit, his wife told the Missouri Independent that their

grocery budget nearly doubled.

They went from spending between two hundred and three hundred dollars every

two weeks on groceries.

To four to five hundred dollars every two weeks.

That's not the CPI number. That's what actually happened when

an actual household with actual income got disrupted and they had

to feed their actual children.

When the government shut down.

Yeah, th the government shut down and the same shutdown broke that data that

we had for housing, so the measurement system was literally broken at

the the one time when real families were experiencing real cost increases.

There's also a woman named Megan Overfeldt.

She's a data entry worker in her thirties and lives in Raytown,

Missouri. She has four kids. She grew up in Johnson County,

Kansas, and her childhood home now sells for three hundred and seventy five thousand

dollars.

She cannot afford to buy in the neighborhood she grew up in.

She has a job, she's an employed adult,

and the neighborhood of her childhood is priced well beyond her reach.

Despite the official numbers saying housing inflation is easy.

Right. And here's the thing the reason sh shelter,

housing in the CPI is so low relative to what people are actually experiencing

is that it's measured with owner's equivalent rent,

the OER. It's asking people what they think they would pay to rent their

own house to themselves. But what Megan Overfeld is actually confronting

is sh can she afford to buy a house?

Can she afford the down payment,

the mortgage, the property taxes?

Those are real costs.

Paul Donovan at UBS Global Wealth Management looked at the CPI and said

it pretty flat out. He said a quarter of the CPI basket is a complete fantasy.

Owner's equivalent rent is a price that no one actually pays.

And he calculated that by using the OER instead of actual housing costs,

the Federal Reserve has systematically understated inflation by about 0.3% points

per year from twenty nineteen to twenty twenty five.

So the measurement's not just lagging,

it's wrong by design.

And if you're Megan trying to figure out why you can't afford your

own childhood neighborhood, the official CPI number is telling

you that housing inflation i is easing.

But it isn't just wrong, it's insulting.

It's telling you that your experience doesn't match the information,

but the information isn't measuring your actual experience.

It's measuring a phantom rent that literally no one pays.

And when you're Chris Myers watching your wife's grocery dum budget double

in a month because the government shut down and disrupted your paycheck,

the CPI saying food inflation is two point seven percent isn't informative,

it's noise.

It is noise. And that noise is what's driving our current policy.

The Federal Reserve is looking at their PCE number,

the public's looking at the CPI,

Chris and Megan are looking at their bills.

None of those numbers are actually talking to one another and they're

all pulled from different sources.

And here's what that means. There's a pattern that goes back all the way to 1983,

so long ago. The official measurement of inflation lags the lived cost,

not by accident, by by design.

When the BLS switched to owner's equivalent rent,

the OER, they were making a deliberate choice to use a hypothetical number instead

of an actual cost. When the the Boskin Commission adjusted that calculation in 1996,

they were making a deliberate choice.

To conclude that inflation was lower than previous calculations suggested,

with the direct policy consequence of reducing Social Security.

And then when the Fed switched to PCE in twenty twelve,

they were making a deliberate choice to look at a different signal than

the one the public hears. All three choices have technical justifications,

but all three choices have consequences for real people.

The consequence being that the policy is built on a number that doesn't match

reality.

Right. And here's why that's a problem beyond just,

you know, the numbers wrong. If the Fed really believes that inflation

is slowing down because they're looking at PCE,

and inflation actually is running hotter than that because the real economy

is more expensive than that can really capture,

then they're gonna keep rates lower than the economic reality requires.

They're gonna keep rates lower which

makes borrowing cheaper, which makes more people demand things,

which makes prices go higher, which makes inflation hotter,

which is the opposite of what the policy goal actually is.

So they're they're responding to the wrong signal.

It might be. Or the signal's responding to them.

If inflation stays high because the Fed's policy's off,

then the Fed's going to point to that and say,

see, inflation is sticky. And then they're going to rethink.

But in the meantime, what's happening to the person actually paying for things?

They're just paying.

Their paycheck isn't going up,

their rent, their mortgage, their groceries,

all of those things are actually going up in real time.

And when the official number says inflation is slowing down,

and their lived experience says everything's getting more expensive,

there's a gap between the official world and the real world.

That gap makes us untrustful.

It it it breaks trust. It it erodes the credibility of

the institution that's supposed to be managing all of this.

Our government.

Or it's private bank the Fed. And more importantly,

it means that the people making the decisions aren't actually connected

to what those decisions cost the taxpayers.

Which is important because the Fed has enormous power.

Yes, they set the rates. Rates flow through the entire financial system,

our entire economy is basically built on them.

Every decision about money, borrowing,

saving, investing, hiring, it all depends upon what the Fed decides.

And they're deciding based on a metric that doesn't match the real lived inflation

because of deliberate choices made in nineteen eighty three.

Then they tweaked it in nineteen ninety six and then tweaked it again

in twenty twelve.

None of which anyone has asked the average taxpayer about,

none of which were put to a democratic vote,

and all of which are now embedded in how we measure the economy that when

you challenge them it sounds like you're being weird instead of paying attention.

Of course even inside the Fed there's doubt about whether

the measurement's working accurately or not.

There is. Kevin Walsh, who's the current Fed chair,

actually testified to the Senate Banking Committee in July about exactly this thing.

He said the Fed has established a task force to evaluate new data sources

and consider methodological changes.

And when he was asked, he asked them directly how how do we ensure that policymakers

are receiving accurate, relevant,

contemporaneous, actionable data?

That's literally the Fed chair asking the Senate.

Whether the data that he is using is any good.

He's not confident. He's not saying the system is working.

He's asking the Senate how to fix this.

So we're at the point where even the Fed doesn't trust the data?

Exactly. They're actually asking for a task force to figure out where there's better

information. That means the entire money money policy apparatus is running

on a measurement system that the people running it admit might

not actually be working. And that's not trivial.

That's the equivalent of an airline saying the the instruments

on your airplane might not be accurate,

but we're gonna fly anyway.

Huh. ~ and the gap between this official number and the real number

is only giving you feel more obvious with the higher inflation stays,

right?

Yeah.

Right now people are frustrated.

I I would say more than that. They they feel that gap every day.

But if inflation stays high or it gets worse,

then that gap is gonna be undeniable.

The Fed's gonna be pointing their PCE numbers and saying inflation's under control

and people are gonna be paying their bills and knowing that that's just not true.

And the institutions are gonna lose credibility,

not because they're corrupt, mm they are,

but because they're literally just not measuring the same world that people

are living in.

So here's what's I guess the wildest part of this whole story.

It's the thing that holds the whole thing up.

It's that the government and the government's private central bank

are measuring inflation with formulas instead of experience.

They're not measuring what a house costs,

but what you'd charge yourself to rent your own house,

not measuring what people actually bought yesterday,

but what would they buy if prices didn't change?

It's mathematically defensible,

but completely disconnected from how any of us actually budget.

And the person making decisions off of these numbers is either looking

at a different number still, or they're looking at the same number,

but it's running six months behind what's actually happening in the world.

Right, so pay attention to this.

Pay attention to the gap. Don't just look at the CPI headline,

look at the cost of housing, look how fast it's moving.

Look at what the Fed is actually targeting,

look at the PCE numbers because those two numbers are moving apart right now.

They're moving apart because one of them is real and one of them is theoretical.

And the policy's built on the theoretical.

So one concrete thing people can actually do next time there's a CPI report

is to look at the shelter component.

And not just read the headline,

listen to what the news is saying about it,

but actually look at whether it's accelerating or decelerating.

Because the shelter keeps running hot and the official story

is that inflation's easing, you're seeing the lie in real time.

And you should ask yourself why we're measuring the thing you pay for with

a number and nobody actually pays.

That one question reveals the entire logic of why the system works the way it does.

We measure inflation with formulas because formulas are stable.

Formulas don't change with politics or what president is in the Oval Office.

And it sounds like science. If the formula doesn't match your life,

well maybe your life is wrong.

But that's not how it works. That's not

How they want you to think it works at least.

So listeners as you know the Overlap is a show about systems of power,

labor, and American injustice.

You can find us at the FOF.foundation,

and you can follow us on Blue Sky or Mastodon.

Yeah, also don't forget to share interesting posts with your friends and family.

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The more you know. Bye.

And with that, bye.