Deflation Coming: CPI Supposedly Headed Nowhere, But Let's Dive Inside


The CPI did much of nothing but some are cheering the rise in apparel prices and rent. Let's investigate further.

This month the BLS Says the CPI Rose 0.1%.

The Fed's preferred way of looking at things (All Items Less Food and Energy) has been heading nowhere on a year-over-year basis for a long time.

The details are interesting.

CPI Weights and Percent Changes

Econoday Comments

Jerome Powell back in May was right, apparel prices were destined to recover which headlines a June consumer price report that will not be raising expectations any further for a rate cut at the month-end FOMC.

The jump in apparel will be getting the headlines but housing is the important key, rising 0.4 percent for rents (3.9 percent on the year) and up 0.3 percent for owners' equivalent rent (3.4 percent on the year). These are fundamental costs for the consumer and the tangible pressure provides a steady to rising floor for the core. Today's report points to an upward move for the Fed's preferred inflation gauge, the PCE core index to be posted at month-end (last at 1.6 percent). For those FOMC policy makers who aren't completely sold on a rate cut, the CPI will offer key talking points.

Talking Points

The Fed wants more inflation.

The average Joe, who has few assets (see Net Wealth Distribution: The Bottom 50% Have 1% of the Wealth) , is sick of it all.

The last thing Joe wants or needs is a jump in rent. Shelter is a whopping 33.2% of the entire CPI.

The worst part, for those seeking to buy a home, is the alleged year-over-year shelter index is a joke. It does not include home prices which are up over 7% from a year ago.

But hey, lets not count that. Houses are assets say the economists.

And let's also average out healthcare. Year-over-year medical care services, 6.9% of the CPI are supposedly up 2.8% on the year. Try explaining that to those not covered by a company plan, who have to buy their own insurance. The increase may be 50% or more.


School is not in the above table, but it is in other tables.

College tuition, 1.6% of the CPI, is up 3.4% year-over-year. Elementary and high school tuition, 0.33% of the CPI, is up 4.1%.

Inflation Illusion

While the year-over-year numbers appear to be going nowhere.

The reported year-over-year rate of inflation is an optical illusion for anyone seeking to buy a home, anyone in a high rent district, anyone who buys their own medical insurance, and anyone in school or with kids in school.

But hey, let's average it all out, ignore housing prices, other asset prices, etc., and pray for more inflation, while paying 0% interest on savings.

Deflation Coming

In a foolish attempt to prevent routine CPI deflation, the Fed propagated bubbles in equities, junk bonds, and housing.

In doing so, the Fed planted the seeds of a very deflationary asset bubble bust.

Mike "Mish" Shedlock

Comments (29)
No. 1-18

The real illusion is many people think they can keep up with it all.


The Fed won’t/can’t stop now. The target is 7-9% inflation/devaluation. The pension “industry” and related FIRE economy is 100% dependent on it.

No way will deflation be tolerated for any significant length of time. And since the Fed has a printing press, and is not afraid to use it???, well, in my book, betting on continued and accelerating devaluation is a no brainer.


Rent is insane near where I live. It's cheaper to make mortgage payments.

And you should be able to get close to 2% on a money market account. Most limit the number of transactions but it's like 12 a year.


i review energy prices for my condo and while we do have years where we can negotiate a lower bulk rate transmission prices always increase in some years negating the decline in raw electricity. I doubt i'll be seeing any real decline in energy prices by the time they get to me they're always inflated

similar problem with autos. cpi assumes improvements are don't count as price increases.

pretty much have to assume a fudge factor to make the cpi relevant.


Property taxes are not counted at ALL in the shelter component of CPI. Those have been rising at close to a double-digit annual rate for years.