The Wrong Basket of Goods
Last week in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell reminded the gathered crowd of central bankers and economic luminaries of the Fed’s commitment to bring inflation back down to 2%. While inflation has dropped from its peak, it still “remains too high.”
As of July 2023, the Consumer Price Index — an array of goods that includes the costs of food, energy, new and used vehicles, apparel, shelter and medical care — was up 3.2% year-over-year. Core inflation, which excludes food and energy costs, yields a higher increase, at 4.7%.
But Gene Ludwig worries that the Fed is looking at the wrong measurement. The CPI skews toward higher income households by including luxury items that don’t reflect living costs for most Americans. Rural populations are excluded. Expenditures for housing and medical care could be distorted.
The former Comptroller of the Currency prefers another metric. Developed by the Ludwig Institute for Shared Economic Prosperity, where Ludwig serves as chairman and founder, the True Living Cost metric differs from the CPI in several ways, by including health insurance premiums and rental rates, and recognizing the necessary role that mobile devices play in modern society. That has the TLC running about a percentage point higher than the CPI for 2021, and even higher in other years, he says.
That could mean the Fed is working toward the wrong target.
Ludwig would also encourage Washington to use a broader array of economic tools to battle inflation, not just restrictive monetary policy. He cites President Joe Biden’s decision in March 2022 to withdraw oil from the Strategic Petroleum Reserve, opening up supply.
“It was a very successful measure. We ought to be looking [at] other areas of the economy that pinch business and people, where we can do the same thing — where we can control inflation not by shutting down the economy, but by building it up,” Ludwig says. “Examples of that would be food production, housing — the things that people, right now, most need.”
Supply chain bottlenecks persist, along with labor strikes and shortages, even as the Fed promises to bring inflation down. Bankers — and the Fed — seem to be settling in for a “higher for longer” interest rate reality.
“We are prepared to raise rates further if appropriate,” said Powell in Jackson Hole, “... until we are confident that inflation is moving sustainably down toward our objective.”
• Emily McCormick, vice president of editorial & research for Bank Director