Whaddya wanna know about key inflation measures?

Make Me Smart May 16, 2024 Transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kai Ryssdal 

Okay, well, here we are. Four seconds early.

Kimberly Adams 

Hello everyone, I’m Kimberly Adams. Welcome back to Make Me Smart, where we make today make sense.

Kai Ryssdal 

I’m Kai Ryssdal. Thursday, May 16. Today we’re going to do a little Q&A on this Thursday.

Kimberly Adams 

Right, we are going to answer some of the questions you dear listeners have sent in. So, if you have a burning question about business money in politics, or this moment in the economy or the culture, let us know. We’re at 508-U-B-SMART. You can also email us at makemesmart@marketplace.org. All right. Our first question today is from Michael in San Francisco. Let’s hear it.

Michael

“Hi Kai and Kimbelry. I’ve noticed that when discussing inflation, the PCE is frequently referred to as the Federal Reserve’s preferred inflation measure. What exactly does preferred mean in this context? Thanks so much.”

Kimberly Adams 

That’s all you, Kai.

Kai Ryssdal 

Okay, so. We should be clear here. I think if you woke Jay Powell up at two o’clock in the morning and said, “What’s your preferred inflation measure?” He would say, “I like them all. I use them all day to day to day.” But here’s why generally speaking, the Fed prefers PCE, right? PCE is personal consumption expenditures index. The other one that regular listeners to Marketplace will know about is something called the CPI, the Consumer Price Index. They come out at different times in the month. The CPI usually comes out first. CPI measures what consumers are paying for a basket of goods, right? They go to the store, they buy something, they pay for it, that’s what the CPI measures. PCE, on the other hand, measures consumption. And I know that’s weird and very granular. But PCE measures things like insurance claims, for which we are not necessarily paying the whole thing out of pocket. Insurance companies are paying. Employers are paying some premiums, right? But we are consuming that. So that’s one reason, right? It’s actually what consumers are consuming as a measure of economic activity. The other thing that PCE does that CPI doesn’t do quite as good a job of is allow for substitution effects. So, if you go to the store, and you see that beef is $47 a pound and chicken is $39. You’re going to buy the chicken even though chicken might not be in that basket. I made up those prices. I shop all the time. I know. I know beef is not $47 a pound unless it’s like wagyu or whatever.

Kimberly Adams 

Let’s say it depends on what get.

Kai Ryssdal 

I know. Exactly, right. The point is, the Fed likes that one more and they find it more responsive to their specific needs. They haven’t always favored PCE, right? They used to use CPI much more heavily, but they want all the data they can get. And CPI tells them things that PCE can’t and PCE tells them things that CPI can’t. But generally speaking, if they had to pick one, they would pick PCE if that makes sense.

Kimberly Adams 

Right. And it hasn’t always been PCE, right? Like, back in the day, they did choose CPI more often so, but it could change again.

Kai Ryssdal

Could change again.

Kimberly Adams

There could be another measure.

Kai Ryssdal 

Who knows there could be, right? Yeah, totally. And look, data, data, data. That’s what the Fed’s been talking about for years and years and years. Okay, Bill in Lebanon, New York. Here you go. Oh, it’s an email. I can read. I can read a rundown. It just takes me a minute. How, Bill writes, is the US Supreme Court funded?

Kimberly Adams 

And I will take this one here in DC. You’re so mean to me today. What’s wrong?

Kai Ryssdal 

I know. I’m a little cranky. I don’t know. Sorry. Well, I’ll tell you exactly what the problem is. 3:20 this morning. 3:20 this morning, I hear this. I hear that I’m dead asleep. And I hear this. And I’m like, what the hell is that? And my wife’s out of bed coming in from the hallway, goes back out. And I hear again. And then she says, do you hear that sound? And it’s.

Kimberly Adams

Oh, no.

Kimberly Adams

Oh, yeah. So, there is something between the first and second floors of our house that much more loudly than I just did, is gnawing on something. And my wife was stepping on the second-floor hallway trying to make it go away. And so, I didn’t have a restful night’s sleep. So, that’s what’s up. But you know, and the pest control people are coming. They can’t come until tomorrow afternoon at three. So, I’m going to hopefully welcome them in the door and then go to the pod and hopefully they will have taken care of whatever it is but anyway, that’s what’s going on me. How are you?

Kimberly Adams 

I once had a family of raccoons living in the air conditioning vent of a terrible apartment I lived in once. And it was disturbing because I was like, what is this noise? And what is this like? Oh god It’s bad news.

Kai Ryssdal 

Here’s the thing. Sorry, one last thing. I want it to escape and live a long happy life. I do not want it to die inside the walls of my house.

Kimberly Adams 

Oh, that would be worse because that smell would never go away.

Kai Ryssdal 

I know. Anyway. So, the Supreme Court.

Kimberly Adams 

Supreme Court. How’s the Supreme Court funded? Okay, funding for the federal judiciary, which includes the Supreme Court is an appropriation, as it is approved by Congress in the annual government. Let’s see the Financial Services and General Government appropriations bill. Now remember, those 12 appropriations bills. Well, at least they’re supposed to be 12 appropriations bills, but it ends up getting lumped together all the time, but whatevs. Well, I guess they did pass some of them separately this time around because late, but they did it.

Kai Ryssdal

Because Congress.

Kimberly Adams

Because Congress. Anyway, it’s passed in the appropriations bills. The federal judiciary requests an annual budget. Congress can approve it or make changes to it. For the 2024 fiscal year, the judiciary requested $8.95 billion in discretionary funds. Congress ended up approving 8.6 3 billion, not far off. But the judiciary also gets some non-appropriated funds through things like court filing fees, and a lot of folks will have already seen the news about the CFPB. The CFPB, big news in the Supreme Court that they approved that Congress can fund agencies however they want to fund it and the CFPB is funded through fees. It’s not part of the appropriations process. So, the courts too have fees that they can use to fund their budgets through court filing fees and things like that. Fun fact: Associate Justices on the Supreme Court are currently paid a little over $298,000 per year. The Chief Justice earns a little over $312,000 a year, which I will tell you is not enough to fund the lifestyles that those justices live. And it is not where most of the justices’ personal wealth comes from. If you’re Clarence Thomas, you fund your lifestyle through you know, free plane rides from friends.

Kai Ryssdal

Yep, yep, yep, yep.

Kimberly Adams

Okay, moving on. Here is the next question.

Nate

“Hi Kimberly and Kai. Hi, this is Nate from Boulder, Colorado. A couple of weeks ago, a friend and I were looking through the March CPI Report, as one does. And we were a little puzzled by the owners’ equivalent rent contribution to CPI. So, my question, why do we take seriously the concept of owners’ equivalent rent as an inflation figure? Hopefully, you can make me smart.”

Kai Ryssdal 

Oh my god. So, first of all, Nate you need to get out more, man.

Kimberly Adams 

No, he does not.

Kai Ryssdal

Yes, he does.

Kimberly Adams

We get to take joy from whatever we want to take joy from.

Kai Ryssdal 

But number two, also do the producers of this podcast hate me? What’s with these questions that I’m getting? Kimberly gets how is the Supreme Court funded? And I get can you explain?

Kimberly Adams 

Cause, you’re the macroeconomy guy, and I’m the Washington person? It fits. It fits.

Kai Ryssdal 

Okay. So, to the root question, why do we take seriously the concept of owners’ equivalent rent as an inflation figure. Because housing is a huge chunk of this economy. And you have to figure out a way to get that into inflation calculations, right? So, that’s the why answer. The how we do it is a completely reasonable question. OER, owner’s equivalent rent is the hypothetical rent that homeowners would pay if they did not own their home. And I know that’s convoluted. And there’s a lot of weighting factors that go in there. But the short answer is housing is too important for us to leave it out of inflation calculations. I will steer you, because she does a way better job than I ever could, to an article in The New York Times yesterday from Jeanna Smialek, one of our Friday regulars and the Times’ Fed correspondent. She’s unbelievably smart. She explains it and basically says, well, this is underselling her a little bit. But she says basically the same thing I do. We have to figure out a way to put it in there, and this is the way we have figured out to come up with. We asked homeowners if they didn’t own their home, what would their rent before their home? Right? It’s owner equivalent rent. And that’s why we do it. Now, is it challenging? Yes. Does it skew figures, especially in the CPI, which has a much bigger chunk of housing in their basket than PCE does? Yes. But you got to have it in there somehow. And this is the way they’ve come up to deal with it.

Kimberly Adams 

Yeah. And just to put a pin in it. Like, you need a way to compare housing sort of on the same baseline, right? Because if you were only looking at rent and the cost of rent and how much rent was going up and down, you’d leave out all the homeowners because they’re obviously not renting. If you were only including mortgages and the cost of mortgages went up and down. Well, that doesn’t work because mortgages are fixed, usually for 30 years, so it’s not as responsive. And so, they’re trying to get something that’s comparable across both of these categories, whether you own or rent. And that’s why we end up with this owner’s equivalent of rent just so that there’s a standard of comparison that will reflect the changing economy in a way that your actual mortgage payment won’t.

Kai Ryssdal 

Right. Two more things to add. Number one, rent is really challenging in these calculations, as you may have been hearing in the last day or so, because rent lags, right? Housing rent, specifically housing cost lag, because rents don’t get renewed every month. You’re not buying a new rent every month, right? You sign a year lease. And then if you move out, then the new person signs a different lease for a higher price. But for that year, you got your rent, right? And so, that’s sticky there. The other part about housing, specifically owning a house, is that it’s not just an inflation figure, right? You’re not just consuming your house as it were. It’s an investment, right? I bought my house, however, many years ago it was now, and it has increased in value. Part of that is because it’s in California, but also a part of that just because housing generally speaking, setting aside 2006 to 2009, housing generally increases in value over time. And so, that’s an investment. So, you have to figure out that calculation as well. It’s legitimately a really hard thing to do. Alright, Brandon. Last one for today. Another email, which now I can read. How do joint fundraising committees avoid violating the rules about coordination between campaigns and PACs? I will also add here. A slightly bracketed comment. Haha. Okay, go ahead.

Kimberly Adams 

I love this question because I had the exact same question, Brandon, when I was talking to Ki Hong a couple of weeks ago about this. And if folks were listening last Thursday, we had a clip from Ki Hong on here talking about joint fundraising committees. And as he was explaining to me how these works. I’m like, whoa, wait, how does that not run afoul of this coordination law, which only applies to Super PACs. The rule barring outside groups from coordinating with candidates or campaigns only applies to Super PACs, not regular PACs. Regular PACs, political action committees, can be party committee or a candidate committee, and it’s fine for them to coordinate. It’s the super PACs, the special interest groups that are technically not supposed to coordinate. Now, just as a reminder, the joint fundraising committee that we’re talking about is an umbrella organization that allows for multiple aligned groups to ask donors for one big check, and divvy up those funds without breaking the rules on campaign contribution limits because basically, they pool all of the contribution limits together, ask for a massive check. And so, when I was talking to Ki Hong, who’s the lawyer who I talked to about this, he said, it is technically legal for a candidate to raise money for a super PAC. But you rarely see it. And you don’t typically see super PACs in joint fundraising committees even though they could be in there because it gives the impression that some coordination is going on. You put up super PAC in your joint fundraising committee, you can say, oh, well, they’re in there, but we’re just not coordinating with them. And everyone’s just going to roll their eyes, and you’ll definitely have the FEC investigating, and nobody wants that headache. So, it’s just not a good look. And you know, when I asked him that he kind of chuckled he was like, you could if you wanted, but it’d be just like way more headache than it’s worth. And for the record, they coordinate. Like, they coordinate in ways that skirts the law. So, one of my favorite eye rolling ways that candidates coordinate with super PACs is they’ll have sections of their websites with just stock footage of themselves, or even like their campaign agenda or talking points, or like, hey, if anybody happens to stumble upon this website, and needs video of me for an ad, or happens to be interested in what we really wish somebody else would say in an ad, but we’re not going to say in an ad, here it is on this page for anybody to use as they want. And obviously super PACs go and get it. And I had a very interesting background conversation with a political strategist who shall remain nameless, that one of the things that campaigns do before anybody even files their candidacy, if they’re running for office, they will look at sort of the people around them and the people they might want to have on staff and they will get together, and they will talk to each other about who’s going to be in Super PAC, who’s going to be on the campaign. And so, they can’t coordinate once person B is in the super PAC. But before the candidate starts running for office, they can coordinate all they want, and they can come up with the whole campaign strategy if they want to. And then once they file, they don’t talk anymore. And that’s fine too.

Kai Ryssdal 

Right. Right. And the super PAC corollary to the campaign making all its documents and stock footage and all that jazz available. And this happened with the DeSantis campaign and the super PAC that’s supporting him. The super PAC like put out a huge campaign outline like on its website just oh, here it is. There you go. Just have a look, you know, so yeah.

Kimberly Adams 

So, they don’t they don’t need to put the super PACs in the joint fundraising committees, and it’s just not worth it for them.

Kai Ryssdal 

Exactly. Money and politics, baby. Alright, we’re done for today. Tomorrow Economics on Tap. News, drinks, we’ll play a game. Live stream starts at 3:30 Pacific, after the rodent guy comes to my house, 6:30 Eastern.

Kimberly Adams 

Make Me Smart is produced by Courtney Burksieker. Audio engineering by Drew Jostad. Ellen Rolfes writes our newsletter. And Thalia Menchaca is our intern.

Kai Ryssdal 

The thing about my house is it’s 110 years old and every time you open up a wall, it’s like $5000. Might as well as just burn it.

Kimberly Adams 

Everything in that house is $10,000. I’ve just decided.

Kai Ryssdal 

Marissa Cabrera is our senior producer. Bridget Bodnar is the director of podcasts. Francesca Levy is the executive director of Digital. And we are. Wait, wait. Out.

Kimberly Adams 

We still made it.