The calculation for the consumer price index (CPI) is going to be updated for January price data, which is scheduled to be released Tuesday morning by the Labor Department.
The new calculation will put more importance on the housing sector and less on used cars and will include some methodological changes that could push the headline number higher than economists had been expecting after a year of rapid price changes.
A segment of the CPI called “owners’ equivalent rent” will now account for more than a quarter of the total calculation, while housing overall will account for more than 44 percent. Used car prices have been lowered in importance after a year in which wholesale and retail used car prices fell out of sync with each other.
Weights are going to be updated annually now in the Labor Department’s calculations, as opposed to every two years.
Economists are expecting CPI to go up by 0.5 percent from December of 2022 to January of 2023. Annual CPI is expected to fall from 6.5 percent to 6.2 percent, according to Bloomberg consensus estimates. It would mark the seventh straight month of decline in annual CPI.
Economists have some concerns with the updated measurements.
“There’s a lag between when the basket is measured and when it gets used in the CPI calculation, however,” Eric Swanson, a professor of economics at the University of California, Irvine, told The Hill.
“For example, the weights they’re using this year are based on consumer patterns from 2021. This does raise some issues that maybe households spending patterns in 2021 were unusual because of the pandemic,” he said.
“The importance of owners’ equivalentrent has increased, which may raise consumer prices in the near term and lower them longer term,” UBS analyst Paul Donovan wrote in a Monday note to investors.
“Owners’ equivalent rent is a fantasy price no one pays. It is loosely linked to market rents — with a lag — and so is expected to be disinflationary later this year but is currently adding to inflation. It is worth remembering that while markets may get worked up about the effect on consumer prices, these moves have no impact on consumers’ spending power, because it is a fantasy price,” he wrote.