Measure It Differently, and Inflation Is Behind Us

livemint.com:

If core inflation came in just below 3%, the Federal Reserve would breathe a huge sigh of relief, stocks would head to the races and consumers could relax about the rising cost of living. It isn’t merely a dream: Measure U.S. price changes the way Europe does, and inflation was already there in May.

Measure them as the U.S. does, and on Wednesday new figures are predicted by economists to show core inflation far higher, at 5% for June. The U.S.

and Europe use different methods to calculate inflation data, but the Bureau of Labor Statistics calculates American price rises the European way too, although the statistic remains obscure. Right now, measuring U.S. inflation using the two methods shows radically different results.

Investors who think they have a handle on the current consensus—that underlying inflation is falling but not fast enough for the Fed—should be troubled by the alternative message coming from the much lower European version of the figures. U.S. core inflation—which excludes volatile food and energy—measured using the standard consumer-price index was 2.3 percentage points higher than the European-style inflation, known as the harmonized index of consumer prices.

It is the biggest gap there has ever been. The main reason is that Europe’s measure, known as HICP, doesn’t include the imaginary cost of what a homeowner would pay to rent their house, which makes up about a third of the U.S. core CPI.

Known as “owners’ equivalent rent" or imputed rent, the measure has long had its critics. Exclude something that no one actually pays, and which is calculated from guesses by homeowners of the rental value of their house, and core inflation’s looking basically fine, at a fraction under 3%. I’ve concentrated on