The Fed's rate policy is driven by flawed data. The BLS's shelter inflation component has a built-in six-month delay and uses outdated collection methods. Real-time data shows inflation is already at target, meaning current high rates are unnecessarily damaging the economy.
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Inaccurate headline statistics are not just academic; they actively shape policy. The misleading Consumer Price Index (CPI), for example, is used to determine Social Security benefits, food assistance eligibility, and state-level minimum wages. This means policy decisions are based on a distorted view of economic reality, leading to ineffective outcomes.
Despite progress on shelter inflation, core services excluding shelter (the "super core") remain sticky. This persistence, linked to wage components, is a primary reason the Federal Reserve will likely pursue a gradual pace of interest rate cuts rather than a more aggressive easing policy.
The Federal Reserve is tightening policy just as forward-looking inflation indicators are pointing towards a significant decline. This pro-cyclical move, reacting to lagging data from a peak inflation print, is a "classic Fed error" that unnecessarily tightens financial conditions and risks derailing the economy.
The host argues that the Consumer Price Index (CPI) is misunderstood. It is not a simple collection of observed prices but a complex calculation involving a significant number of "imputed" or estimated values. Understanding this is crucial to interpreting inflation data correctly.
Due to budget and staffing cuts at the Bureau of Labor Statistics, more than 33% of the Consumer Price Index is now estimated rather than directly surveyed. This significant increase in imputation questions the reliability of a key metric for economic policy.
The Fed uses slow, imprecise methods like household surveys to measure key inflation components like rent. This creates a significant lag, causing them to be late in both recognizing rising inflation (as in 2021) and seeing its decline, resulting in harmful policy errors and misallocation of trillions.
The Federal Reserve bases policy on official government labor data, which lags real-time private sector data that markets already reflect. This delay causes the Fed to 'drag its feet' on necessary policy changes like rate cuts, creating a predictable tension and period of volatility that astute investors can navigate.
Despite official CPI averaging under 2% from 2010-2020, the actual cost of major assets like homes and stocks exploded. This disconnect shows that government inflation data fails to reflect the reality of eroding purchasing power, which is a key driver of public frustration.
Due to budget cuts at the Bureau of Labor Statistics (BLS), roughly 20% of all prices in the CPI are now imputed, up from just 2-3% a year ago. This increases the margin of error and reduces confidence in official inflation statistics.
The October 2025 government shutdown forced data collectors to input zeros for parts of the shelter survey. This technicality will artificially depress the year-over-year CPI shelter component for six months, making disinflation look stronger than it actually is until about April 2026.
