The Council of Economic Advisors (CEA) for the Biden administration described its “new wage measure for core non-housing services” as a way to better describe wage growth and its relationship to inflation. However, the attempt seems to be part of a greater push to make inflation look lower and potentially influence the Federal Reserve into seeing more reason to end, and ultimately reduce, interest rate increases.
The problem is that eventually what is left for governments, businesses, non-profit institutions, and consumers is an ever more confusing mix of what is real or if a new measure is an attempt to paint a prettier, although more limited, picture.
The argument on the part of the administration is that there are already different measures of inflation, with core inflation looking at price growth without food or energy. That is so-called core inflation. Energy and food have historically been omitted because they historically have more volatility — more fluctuation — than other components, and so make understanding trends more difficult.
The CEA then says that a measure of inflation that looks at services that don’t include housing (NHS) “has garnered considerable interest of late.” An NHS measure would not only eliminate energy (it had been the fastest growing component of inflation for a while) and food (which was up there), but now would exclude housing (the current single highest driver component of inflation). However, that creates its own problems.
“All these things, whether talking about international economics data, comparisons, or what the Fed’s looking at, really turns into drive-time sports radio,” says Giacomo Santangelo, a senior lecturer of economics at Fordham University. “[The Federal Government] wants to be able to say, ‘It’s a strong economy and our fight against inflation is working.’ If CPI [or the Consumer Price Index, the usual measure of inflation] isn’t doing it, we go into core inflation, and if core inflation isn’t doing it, we’ll find out something else. That’s why 2022’s word of the year is gaslighting.”
The question becomes what anything means and what industries like CRE and individuals look at and consider when making decisions.
The call for a new NHS wage measure fits in with an NHS theory of inflation. “Because non-housing services are more labor intensive than the other categories, some surmise that the tight labor market may be playing a meaningful a role in this part of inflation,” the CEA argued. It then noted that average hourly earnings (AHE) and Employment Cost Index (ECI) don’t show “the potential relationship between NHS inflation and the labor market.”
In other words, by taking housing services out of calculations, the result would likely be lower apparent wage growth than currently displayed. And, although unstated, as the Federal Reserve has paid close attention to labor and wage numbers and said they have been a concern, perhaps it’s a way to declare inflation closer to being tamed — and offer a potential reason to drop interest rates faster.
Calling it “creative accounting,” Santangelo says the concept ultimately is probably a mistake.
“I’ll keep eliminating things until I get the answer that I want,” he says. “The number is a real thing [in itself], but I don’t know that the key to understand what’s going on is counting fewer things.”