Page 16 - NBIZ October 2021

Some of the data is gathered in the field, some via the U.S. ANNUAL INFLATION RATES
internet, and some from vendors like the J.D. Power
Information Network and the National Automobile
Dealers Association.
Prices for some items are straightforward, like a
pound of bacon or a gallon of regular, unleaded gasoline.
Others are a bit fuzzy, like the cost of funeral services or
the price of an airline ticket. And some are downright
obtuse. The cost of housing falls in that category.
BLS considers a house to be a capital good, not an
item that’s consumed. The function of the house is to
provide shelter. It’s the shelter function that BLS prices.
For a rental property, that’s straightforward. The cost
is equal to the monthly rent. For a house owned by the
occupant, it becomes more difficult. BLS calculates the Source: U.S. Bureaus of Labor Statistics and Economic Analysis
owner’s equivalent rent (OER), i.e., what the owner would
pay if they rented the same house rather than owned
it. BLS reassess the homes in its survey twice a year to This lower PCE inflation rate has factored into the Fed’s
capture any theoretical increase in rent that would have decision to postpone raising interest rates until next year,
occurred over the previous six months. along with projections by the various Fed branch banks
In the final CPI calculations, BLS assigns importance that inflation will taper off soon.

to each item based on a typical house hold’s spending
pat terns. These weights are deter mined by the Consumer FORECASTED PCE INFLATION
Expend iture Survey, another BLS project, which tracks
house hold spending over 12 months.
The CPI measures changes in prices that a typical
house hold pays for a market basket of goods and ser-
vices. Of course, there’s no such thing as a “typical”
household. For instance, 95 percent of Houston house-
holds own at least one vehicle, but only two-thirds own a
pet, and less than 15 percent of the population smokes. The Impact on Houston
If one doesn’t travel, changes in the cost of airfare have Houston’s recovery is tied to the U.S. recovery. The
no impact on the family budget. Owner’s equivalent rent region will receive little help from the energy industry this
(OER) comprises a third of the CPI, but 60 percent of all time. When the Fed raises interest rates to moderate U.S.
housing units in metro Houston are owner-occupied, so growth, local growth will moderate as well. Buying on
any increases in OER likely overstate changes in shelter credit will be more costly, tamping down consumer de mand.
costs for those households. Higher rates will hike monthly mortgage payments, which
will cool the over-heated housing market. And busi nesses
An Alternate Measure of Inflation will pay more to finance inventories, equipment purchases,
Though the media focuses on changes in the CPI, and new buildings, slowing local businesses invest. Most
the Fed eral Reserve focuses on a different measure impor tantly, a rate hike will signal that the Fed has deter-
of inflation, the Personal Consumption Expenditures mined the U.S. economy has price stability and is approach-
Index (PCE), when set ting monetary policy. The Bureau ing full employment. As noted earlier, the Fed is expected to
of Economic Analysis (BEA) produces the PCE, which start raising interest rates in the middle of next year.
includes many of the same con cepts as the CPI, but with
a few exceptions. A DIFFERENT SORT OF INDEX
The PCE captures changes in consumer behavior due Three times a year, the Partnership’s research team
to changes in prices. For example, if the price of beef rises, fans out to gather prices on a host of items—bananas,
shoppers will likely buy more chicken and less red meat. tuna, single-family homes, utility bills, movie tickets, teeth
The Fed also removes outliers from the PCE, items clean ing, tire rotation and the like. The Partnership is one
whose prices have swung in recent months due to one-off of over 300 organizations that regularly gathers data for
events (droughts, hurricanes, port closures) that don’t the Cost-of-Living Index (COLI) prepared by the Council
reflect overall price trends. The result is what the Fed for Com munity and Economic Research (C2ER). While the
refers to as the “trimmed mean PCE inflation rate”. The CPI and PCE measure infla tion, COLI measures differ-
CPI and the headline PCE tend to track each other, but in ences in living costs among U.S. metro areas. The index
recent months, the 12-month trimmed mean PCE has run illustrates how affordable Houston is compared to other
much cooler than the CPI. U.S. metros. The most recent COLI, released in September,

16 NBIZ ■ October 2021