Key Inflation Gauge Overstating Prices, Harvard’s Cavallo Says

Inflation may not be rising as sharply as some recent government reports suggest, according to economist Alberto Cavallo.

The consumer price index -- which climbed last month by the most since 2009 -- is giving too much weight to the transportation sector and that’s driving up the overall figure, Cavallo, who teaches at Harvard Business School, said on Twitter this weekend.

Cavallo’s analysis comes as statisticians and economists struggle to figure out how to best measure inflation during such an precedented economic cycle. The Bureau of Labor Statistics’ consumer price index is based on a “basket” of stuff that Americans typically buy -- but that looks much different during a global health crisis.

Now, this so-called basket is putting too much emphasis on transportation spending, which is still 25% below pre-pandemic levels, according to Cavallo. As a result, the index is overstating price gains by more than half a percentage point on a year-over-year basis, he estimates.

The April CPI report showed broad gains across most categories, including sharp increases in prices for motor vehicles.

Meantime, other measures of consumer prices are rising more modestly. For example, the Federal Reserve Bank of Cleveland’s median gauge of consumer prices, which omits outliers like big price swings, has increased at a more tepid pace in recent months.

Key Inflation Gauge Overstating Prices, Harvard’s Cavallo Says

“This suggests that much of the uptick in inflation is tied to idiosyncratic Covid impacts rather than broad-based price growth,” according to an economics research note published by Nationwide Insurance, referring to the differences in measures of consumer prices.

While some economists expect a recent pickup in inflation to be more lasting, Federal Reserve officials have said price pressures from pent-up demand and bottlenecks will likely prove temporary.

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