Is Inflation High? Not According to the Producer Price Index

Cato Institute economist Alan Reynolds points out, in “Producer Price Inflation Averaged One Percent for Eight Months,” Cato at Liberty, March 21, 2023, that, as the title suggests producer price inflation is very low.

So why does inflation measured by the Consumer Price Index look so high?

Reynolds explains:

Although market rents have been falling since last summer, BLS estimates of rents on old and new leases still keep soaring in CPI monthly reports—at a 9.6 percent annual rate for the past three months!

That statistical snafu made inflation in 2021 look lower than it really was, because shelter inflation was largely based on depressed 2020 pandemic rents. Today, the lagged BLS rent estimates have the opposite effect of greatly exaggerating inflation in early 2023 because reported shelter inflation (a third of the CPI) is still largely based on leases from the peak inflation of early 2022.

Once we exclude shelter from CPI inflation, the resulting “CPI less shelter” is about like the PPI. CPI‐​less shelter has averaged just 1.1 percent since last June, as shown in my March 14 blog post.

This is astounding. Unless Alan has, or I have, overlooked something, this means that inflation is already quite low.