But consumers’ good news is not quite so good, because the bad news on inflation was not quite so bad.
Economists are criticized for subtracting specific prices from the headline inflation number. This criticism comes from ignorance. If economists’ focus is interest-rate-sensitive inflation pressures, excluding food and energy is appropriate. If the focus is corporate pricing power, excluding regulated prices makes sense. And if the focus is consumer spending power, it is reasonable to look only at the prices consumers actually pay.
For instance, a significant part of recent US consumer price inflation has been caused by the housing measure owners’ equivalent rent. This is a complete fiction—a made up price that no one actually pays. Looking at the prices homeowners pay (excluding owners’ equivalent rent) is a better metric of consumer spending power.
As owners’ equivalent rent falls, headline inflation will fall. But this will not increase US homeowners’ spending firepower. If the decline in inflation is just lower owners’ equivalent rent, that gives no new “relief for consumers.” Some of the future inflation decline is simply catching up with current inflation reality.
Main contributor - Paul Donovan
Original report - Is lower inflation good for consumers?, 28 July 2023.