Consumer Sentiment & the C.P.Lie

The latest Michigan survey saw 1Y-inflation expectations increase to 3.5% (versus 3.2% expected) and consumer sentiment plunge from 69.1 to 65.6 (versus 72 expected).

We don't need to tell you that this is a bad outright terrible result, but meanwhile the Fed as usual has its blinders on, desperate to explain it away because, after all, "why, at a time of falling inflation, low unemployment, and strong economic growth, do voters appear so unsatisfied with the state of the economy, and in how Biden is handling the economy? Why in particular do voters complain so much about inflation?" (That's a quote)

The first comes from the Richmond Fed, which finds that "consumers whose political party is in office tend to have higher sentiment than those affiliated with the party not in office," noting that "the partisan sentiment gap has widened over time."

The second, much more convincing result, is some research from the Chicago School of Business, which used the pre-1983 CPI that took home prices and mortgage interest payments into account.

"If it still did, inflation would have peaked at nearly 18 percent in late 2022, about double the current CPI measure."

In fact, as the study itself claims, "If we measured inflation as the BLS did in the 1970s, the recent bout of inflation would have been even higher than the worst of the 1970s! It really is as bad now as it was then."

If the CPI were to include interest paid on personal debt (such as auto loans and credit-card debt), that would also produce a much higher inflation rate than suggested by the current official measure (chart above). In fact, using this CPI, the year-over-year change in inflation has only just returned back down to its 2022 highs.

Maybe this would better explain for the economists like John Cochrane why "voters complain so much about inflation?"