YouSaid · the spoken record

Omair Sharif

lines on the record: 47
first: 2021-09-02
most recent: 2021-09-02
sittings or episodes: 1
sources: podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

“Yes, I think let me preface this by saying for the most part, economists are really terrible at picking up turning points and paradigm shifts and things of that nature, which is why there's such a large literature on how to forecast inflation. But yeah, I think one of the things that at least I'm on the lookout for and I think others are as well is to think about the idea of how all this sort of disturbance in supply chains is potentially going to lead to, let's say, onshoring. We're talking about building more semiconductor factories here in the US. We're talking about having sort of more of manufacturing in the US. And what does that mean for inflation going forward? So that's potentially a big paradigm shift that I think we need to be on the lookout for, but is that going to be a 6, 12, 18 month thing? I'm pretty skeptical of that. To me, that is a much broader, much sort of longer 10-year type of topic to think about.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Change in the core CPI. And that's a huge, huge number. Got a lot of attention. And so people started talking about hedonics again. And that's where the so-called sort of inflation truthers come in is like, well, this is just this arbitrary adjustment that they're making and so on. But this is the kind of stuff that goes on on a pretty regular basis. Typically, you just don't see those kinds of moves. But for the most part, these things are pretty standard. And not just for, by the way, not just for the BLS, but almost for every statistical agency that does a CPI. At the end of the day, the CPIs, you always want a price between one month and the prior month the same good. And if it's changing in quality, you have to try to control for that quality. So these adjustments are happening Canadian CPI and Eurostat and so on.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think we went to unlimited wireless plans in, I think it was February, March of 2017. So when we switched over from, let's say you paid however much your bill was for a certain amount for your phone, when we went to unlimited plans and you had, you know, instead of having 10 gigs and you maybe had 30 or whatever it was, they had to find a way to price that out. And that's where kind of the hedonic regressions came in was to say, you know, How much is this extra speed worth or how much is this extra memory worth? How much is this extra data plan worth to the consumer? And once they came up with those measurements, they applied them in what it ended up leading to was about a 7% decline in the wireless index in one month, which is a record decline. And it subtracted about almost close to a tenth, just a bit over a tenth off of the month.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“To those sorts of kind of quality adjustments. Other indexes are subject to other types of adjustments, but they tend to be much smaller. So for example, with rent, rent, there's something called an age-biased adjustment because you've got an apartment and you happen to make it into the BLS survey. And in January, they come to you and they say, you know, what do you pay for rent? You give them a number, they come back to you in July, six months later. And of course, let's say you've got a year lease, your rent hasn't changed. But your apartment six months over. And so they apply what's called an age bias adjustment to your apartment. It doesn't really change very much, but those are the other sort of types of adjustments that the BLS will make. But for hedonics, it's just not a big fraction of the index that is really kind of getting that kind of a treatment. And it's really only, you know, it only really comes to light when you have these huge moves like you did with wireless.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“I'm sure you kind of remember this whole wireless thing in March of 2017. Yeah, so things like that is where you see Hedonics. Apparel is one where you see hedonics. And so it really is just limited to goods. And also when you think about hedonic adjustments for the most part, I think it's about only about four or five percent of the CPI is actually subject”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, apparel's one that has just really, you sort of just have to look at the patterns. And honestly, it's much more about kind of looking at these patterns and thinking about to what extent you're following the same trajectory as you did in the past for something like Peril.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think apparel. Apparel is one where in 15, 20 years of doing this, I've literally just never found anything. That works at forecasting apparel, other than, you know, one of the approaches I mentioned earlier, which is just this naive approach of saying, okay, looking at these things on an unadjusted basis, you get a sense for sort of seasonal patterns. And let's say apparel every March tends to decline by about two tenths. You're going to be probably doing a decent job if you put in a drop of two tenths because there's very little to go on when it comes to apparel prices. I've tried using everything from import prices to different data sets, retail sales and so on. And there's just nothing that gives you a good lead into what Apparel's doing. And that's been another tough one to do. Not as difficult as airfares. Airfares, at least you know what they're doing. You just can't replicate it exactly.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“We had another huge burst over the last several months. And whether that's mostly a function of sort of the demand side or the supplies, I'm definitely more on the supply side part of that story. But we still have kind of to deal with this idea of the delta variant and what is that going to do to activity going forward? What is that going to do for the demand for used cars and new vehicles later into this year and into next year? I don't know that anyone's got a good answer for that, but that is something that I think kind of remains an upward risk in the inflation story is we sort of see a repeat of some of these upward pressures from something like the Delta variant going forward. But more persistently, it would definitely be some of this wage pass-through into some of these components that I mentioned earlier.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“And it was for that index was a huge, huge jump. And we know that wages are going up in leisure and hospitality, for example. And so the idea that some of this might be feeding through, for example, into hotel rates or limited service restaurants and things like that, those are areas where potentially you start to say, okay, we keep seeing wages move up at these sorts of rates. If this really is that kind of a pass-through, then this is potentially something that is more persistent that will last into next year. And it's not going to be something sort of a one-off shock like, let's say, oil price shock or something of that nature. This is something that is potentially more persistent. And I have to say, I think even with something like used cars, we know they're starting to come off. I am a little bit weary of just kind of having a repeat of what we had, which is last summer we had a huge jump in used car prices. It completely tailed off. It declined throughout the fall and winter until”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So, one of the things that's kind of come up in the last print or two that I'm going to be keeping a pretty close eye on going forward is this idea of whether some of the pickup we've seen recently in wages begins to pass through more persistently into the inflation data. And we saw this actually last month in the Food Away from Home Index. There was a pretty big increase in”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“You can look at BlackBook and JD Power and so on to get a sense of what used car prices might do. And then there's, of course, the billion prices project. There, I think you just have to be a little bit careful because a lot of what they are capturing is much more, has much more to do with goods prices and much less to do with services prices. But for goods prices, that does a pretty decent job from time to time. There are other things that you can certainly look at. GasBuddy, which is actually now being used directly in the CPI. So they've gone from having 1,000 quotes on gasoline each month to having millions of quotes because essentially they've crowdsourced the data is something else that you can also look at. So there definitely are alternative data sets that you can try to work into into your forecast.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so there's a couple things I do for certain components that where I will look at non-BLS data sets to try to get a sense of what's going on. And one of those, for example, is just airfares. Airfares is only worth a little bit less than 1% of the core, but it's basically been the bane of my existence and forecasting for the last 15 years because it's incredibly convoluted the way that it's done. You know, at the end of the day, what they're really pricing is, you know, they're going to the websites of Delta, America, and Southwest, so on, and they're pricing flights out. So you can try and come up with an index yourself where you just, you know, go onto these websites and try to say, hey, what's the flight from New York to LA going to cost me or New York to Miami or whatever? And so you can sort of look at those sorts of data to try to help you forecast the Airfair Sundex.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Vegetables and so on, but it doesn't mean that you're necessarily going to go in and forecast uncooked beef steaks, for example. You could, you could, but it would take you a month or longer to just come up with a simple forecast. I mean, I used to spend probably two days just doing the food forecast. So you have to kind of make some choices about the timeliness of your forecast and how into the weeds you're going to be able to go in order to produce something that's actually actionable.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so I don't know if I can pull up the salad dressing forecast just now. But I would stick when you get to kind of that level, you have to make choices, right? I mean, like I said, there's over 7,000 item area indexes. There's over 211 sort of broad components in the CPI, most likely when you kind of get something like food, which has dozens of indexes. You kind of have to make a choice in terms of how far you're going to drill down. So I might follow all of these, you know, I've got them in my spreadsheets and so on, but when it kind of comes to forecasting, you're probably going to want to stick, for example, with looking at the broader two, which is the food at home index, which kind of encompasses the entire grocery basket and the food away from home with restaurant prices. And there with women food at home, you would, if you want to drill down, you would break it down into some of these components. So cereals, you know, the various types of meats, eggs, food.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“It's coming out 48 hours before the number prints, and that's really not much of an edge. But it's a detailed analysis, the timeliness. And then finally, I would say I'm probably on the horn with the BLS, if not daily, you know, at least once a week, even though I've been doing this for a long time. It is honestly just a constant kind of learning process. I mean, there's about 211 indicators that go into the CPI. There's over 7,000 basic item in area indexes that you could look at. And so it's just kind of a constant learning process. And it's, you know, for me, I've always had this luckily good rapport with the folks there who I think are incredibly helpful in terms of learning about the components and so on. And that's sort of the kind of, I think, the kind of knowledge you're not really going to be able to get most other places.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So for me, my target audience is mostly institutional clients, right? The folks who actually are trading tips and who are trading the fixings. So in that respect, the pitch is really sort of, I would say there's kind of three main elements. One is the actual forecast. For me, luckily, I've been doing this long enough where I've got a reputation, I've got a hit track record in history that I can present to clients and say, look, What I'm trying to build here is the best in class forecast that you will get on the scene.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Would term a cyclical. And essentially, policy can't really impact them. So stuff like medical care, for example, whatever you're doing with policy is probably not really going to impact physicians' prices or hospital prices. And so 60% of the index just doesn't really react to policy. And even the 40% that does, you know, it's going to be a bit of time that's 12 to 18 months. This approach is pretty narrowly focused on kind of just that kind of window. So I would say that if it does, it's kind of hard to really incorporate it into this sort of a framework when you're thinking about forecasting.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“The way when you're doing this sort of approach is almost by design, it's a very short-term approach. I'm not going to sit here and say, hey, I'm going to forecast inflation for the next five years doing this approach because it's just not designed to do anything like that. When you're doing something like this, it's much more looking at, let's say, the 12, next 12 to 18 months. And really, if you think about policy and the lags, you know, to some extent, maybe it's impacting some of these components in that time frame, let's say especially housing. But in the 12 to 18 months, it doesn't play that big of a role. And honestly, if you even think about the way that these indexes work, the San Francisco Fed a couple years ago had a great paper where they applied kind of the Phillips curve methodology to individual components of the PC. And what they found was a roughly 60% of these components or what they”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Potentially removed from actually trading or managing money. The folks who are managing the money, they are into the weeds of it. And it's funny because as I mentioned when I was on the sales side, when I did this very few people did it, now being on the buy side the last two years, I was a consumer of all the sell side research. So I got all the research from the banks on inflation and how they forecast it and so on. And it's funny to me because now a lot of people take this bottom-up approach on the sell side as well, some more so than others. But it's kind of the way everyone on the sell side is doing it now. Because I think there's a value add in understanding the weeds of, you know, what's driving shelter inflation and what's driving apparel prices and so on. Because it really does give you a window into where the kind of headline number is going. And importantly, is it going to stick or is it just kind of a one-off?”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“I think for the most part, people are incredibly receptive to it. I mean, when I started doing this, I don't know of many shops or many individuals who were taking this kind of bottom approach and sort of doing detailed analysis of the components and index construction and so on. And I think people are, especially periods like this, they want to understand what is moving the print. Is it a one-off print? Was there something driving it this month that could be more persistent? And how do I think about that for the following month? Because if you're an investor and you're in the tips market or you're interested in the fixings, one month obviously influences everything. And so you really want to understand what's going on kind of beneath the hood of the data. So I think people are incredibly receptive. And, you know, in terms of getting pushback from folks who are like, hey, this is just the Fed's money printing. There's always some element of that. But I find that those are the folks who are.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“You were down about 3%, 4% and wholesale prices over the last couple of months. So I think sort of to your point, I think we are starting to see some of that happen in some of these components.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, that's a good point. It's possible, but I think where you would see that, obviously, would be a ramping up in the inventory numbers for some of the places where we are seeing shortages now, where we are seeing orders pick up steam. I mean, honestly, to some extent, to your point, we're kind of seeing this with used cars now. So wholesale prices have been coming off the last couple of months. And again, where you really want to look is out in the inventory side. So when you look at used cars, when you look at the wholesale piece of that, we're only about a couple of days below a normal level of inventory for wholesale used vehicles. And on the retail side is actually pretty similar as well. So we're catching up on the inventory side and getting to something that actually really resembles normality in the wholesale used vehicle market. And lo and behold,”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Do just to the seasonal factor. So no big story, but if you understand the seasonality and understand how this thing is constructed, it gives you an edge in terms of forecasting this number.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Way we actually compute and construct the data. And it has less to do with these broader stories that we're trying to explain or trying to use to explain the inflation number. Sometimes it's just about understanding how this thing is built and sort of really getting into the weeds of understanding the parts that sort of make up the sum. And that good example is motor vehicle insurance. This is an index that a lot of people don't pay attention to. Last month was down about two and a half percent. you know, a little bit less than a full tenth off the core CPI, which is a lot when the core is around 0.3 only. And it has nothing to do with a big story. Insurers are not cutting your rates. It just has to do with the way the seasonality is working out this year for this particular index. And it's going to be a very similar story when the next print comes out. Insurance and motor vehicle insurance should be down around two and a half, 3% again.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“A lot of slowdown, I think, in the core, and much more, I think, in the core PC, for example, I wouldn't be surprised if by the middle of 22 we're talking about core PC being closer to around 2%, whereas the core CPI potentially is still punching along at around 2.5%. And one thing I just want to mention is, you know, you talked a little bit about some of these macro stories with, you know, chip shortages and so on. These are important, right? We like to have narratives to try to explain something. One of the things with when you are really in the weeds of this inflation data is that as important as those narratives are to kind of understand the picture, most people don't really pay attention to the fact that a lot of price movements that you tend to see have nothing to do with a macro story or a micro story. It's literally just about the way the methodology works in the index. It's about the seasonality of the index. It's about changes in the”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“And we go back to kind of the Fed's preferred measure, the PCE. The San Francisco Fed actually does a nice job keeping track of some of these dispersion measures and so on. And what you look at now is that about roughly, if you sort of look at all the components in the PC, about 84, 85%, 85% of them currently are showing price gains. And that sounds like a pretty big number that most of the components are rising. But in fact, it's only a couple of percentage points more than what we were seeing sort of pre-pandemic. So it's not clear to me that we've seen a big broadening out of price pressures. We've seen, as you mentioned, just really concentrated increases in pressures in some components. So I'm still very much in the camp that as we sort of get through the spring of 2022, we're essentially going to see”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“That's an area where you might start to see some upward pressure come as in air fairs. And on the flip side, hotel rates are running about 8% above where you'd expect them to be right now. And so that's the place where you might get a little bit of give back. And if you don't, then you potentially start to get a little bit of concern that this might stick a bit longer than you would have expected.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“That's picking up steam or losing steam. And that, once you weight those sort of changes, gives you a sense of kind of the underlying momentum that's really sort of driving the aggregate core number. And then one final thing, which I think is pretty important right now, especially since we are sort of comparing everything to kind of the pre-pandemic time, is you've got to kind of keep a close eye on where the price level is today for certain components versus not just where it was, let's say, in February 2020, but where would you expect it to be today given the pre-pandemic trend? So are we overshooting that or are we undershooting that? And I think a good example here is something like airfares, right? There's still about 10% above, excuse me, below their February 2020 level, but they're more like 13% below where you would expect them to be if they had just continued on their pre-pandemic trend. So that kind of tells you things normally.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Will it spread out to other components? I think a few ways to kind of think about that. One, for example, is just simply look at the dispersion within the CPI. So what share of components are seeing price increases today versus price decreases? And also, what does that look like on a weighted average basis versus history? So you could have a lot of components, for example, rising. But if combined the weight of those components is not that high, It really may not matter for kind of the longer term inflation picture. Another thing that I like to look at is momentum within the core CPI. So here what I want to look at is, you know, what is a share of components that are either accelerating or decelerating within the core CPI? And here you can sort of, you know, normally you would look at, for example, the 12-month change in the year-over-year rate of specific components and see.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So, to me, it's just about how long that rate of change continues to sort of accelerate. So used cars going up year over year from zero, basically, which is where they were pre-pandemic to now at 40%. The question is, how long can we sort of, not just how long will that persist, but can it continually go up in sort of the rates we've seen over the last six months? That's kind of the way I think about it. I think the way that Cher Powell has sort of explained inflation as well is it's this process of can we see continually this rate of growth sort of accelerate year after year after year? And that's what we're sort of looking at for these components, but obviously much more sort of in the short term. But I do think there's a couple of ways to think about this transitory question. And if you're trying to figure out, is the inflation I'm seeing now transitory or is it going to continue?”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“About another 80 basis points. Rent's got about a 40% weight. You go up two percentage points. That's about 80 bits on the core CPI. Now that sounds like a lot, but you mentioned used cars earlier. They're adding over 130 basis points to the core CPI right now on a year-over-year basis. That's almost certainly going to come off. So even if OER goes up and rent goes up a couple of percentage points over the course of, let's say, the next year, 18 months, that's almost certainly going to be offset to a great extent by a lot of these things that we're seeing now that we continue to think are transitory. That's going to upset a lot of the upward pressure you're going to get from shelter, I think, over the course of the next 18 months. So it's kind of important to keep that in perspective because, again, four and a half percent is really where we peaked in the past. And even if we get a bit higher than that, year over year, 40% on used cars is not going to stick.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“To see these places stabilize and move up. But I think there's something to keep in mind here about this whole story about shelters coming and OER is going to go up and so on. Number one, people again are looking at these private market rent data and they're seeing 7%, 8% growth. We've never seen anything like that in CPI. I'm hard pressed to think we'll see anything like that over, let's say, the course of the next year. Will rent go up? Yes, but don't forget before the pandemic, we were running around three and a half percent. We're about 2.5% right now in rent and OER combined. So, you know, even if you move up a full percentage point over the course of the next year, you'll be kind of right back where you started in early 2020. But let's assume for a moment that we move up to four and a half percent. So another two percentage points from where we are today. What that basically means is you're looking at overall core inflation rising by roughly.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So we have seen both of these measures, both right now, are actually bottom out over the course of the last several months, and you're starting to see price increases in the major metro areas. And so even places like New York, Los Angeles, Chicago, San Francisco, which are still down pretty sharply year over year, it looks like on a monthly basis they've finally kind of begun to stabilize a little bit. And it's important to kind of understand when you talk about the CPI that A lot of these rent indices what really matters is where these so-called class A cities, which are the big ones with populations over two and a half million, what they're doing, because the weights on these cities is incredibly large. So if you looked at just three of them, New York, Los Angeles, Chicago, that is 20% of the entire Ren index from just those three metro areas. So where they go matters quite a lot for the overall index. But we are starting.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So, part of his conceptual issue, but the other part is just the methodology and the way that the sample works, you're just never going to have the magnitude of the changes that you see in all these sort of private sector indexes.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So that is a consensual issue. It's just underlies sort of what the CPI is really meant to do. The second part of this, I think, is that when you look at, for example, Zillow, CoreLogic, and you're seeing rents up 70%, or you're seeing Kay Schiller saying house prices are up 20%, one of the reasons you don't see it in the CPI indexes to that magnitude is because there's just very little turnover in the CPI sample. Every month only about 10 to 15 percent of the sample actually represents new renters. And so what you see in list prices, that might be moving very quickly when market conditions are changing. That shows up over the course of about 12 to 18 months in the CPI because you just don't have that same kind of turnover that you see in these indexes that look at just, for example, listed rents.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“On how to get around eliminating the investment piece of it and focusing just on the shelter part of it. And they made that change in 1983. And another part of the reason for making that change was, you know, as you recall, interest rates were kind of all over the map in the late 70s and the early 80s. That introduced a tremendous amount of volatility in the CPI to the point where it sort of became, I don't want to say useless, but so volatile that it was really hard to get any kind of sense of what was going on with underlying inflation. And you had everything tied to it, you know, cost of living adjustments, wage negotiations were tied to it. And one year it was up 10, 11 percent. The next year might be back down to 3%. So it was sort of losing its significance. And so this decision was made to work on trying to implement this onerous equivalent rent index, which finally came into play in 1983.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“So we actually used to include it. So prior to 1983 in the CPI, for example, they took what was called the asset approach. And so that included the price of a house. It included everything related to your mortgage interest costs, property taxes and so on. And even though from about the late 50s to about 1983, they did it in this manner. They knew from really the early 60s that this was not the right approach. And this was just a conceptual issue with the CPI. All this had to do with to say, what we're really doing here is we're capturing an investment piece of the house and we're also, what we really want to capture is just the consumption aspect of it. And so they knew for 20 plus years that even though they were doing this manner, this was not what they wanted to actually be doing in terms of the CPI. And finally around the late 70s, they started doing more detailed work.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Pretty much the last 40, 50 years about how should we really capture house prices? What is their role in an index? And the CPI is very clear. We don't want anything to do with house prices. Why? Because we consider it to be an asset. We're trying to measure what you pay out of pocket as a consumer. And so these are the kinds of debates that I think when you're paying, when you're seeing home prices go up 20, 30 percent, you care less about what statisticians are arguing about when it comes to imputation and so on. You just know that if you want to buy house, you've got to pay 20% more than maybe you did last year. And so you tend to kind of lose the public when you're getting into those sorts of weeds in the inflation data. But I think for the most part, these indexes do a pretty good job of capturing what's going on in terms of the pricing environment around us.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, look, I mean, at the end of the day, all of this stuff is a construct, right? And there's certain things in there which I think do a great job of reflecting reality. And if we think about energy, that's a very simple one. Everybody knows what they're paying at the pumper for gasoline. And within the CPI, you're capturing these movements in energy prices. Those are pretty straightforward. The same thing is true of when you think about car prices. These are items that are pretty easy to capture. And they do a pretty good job sort of representing reality. Where you start to get, we start to lose people, frankly, is when you kind of get into some of the sort of the price index theory and sort of the number theory where you start to talk about imputations and how to handle missing prices and owner's equivalent rent is a great example. There's been a debate about this for”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Who you are. If you're the Fed, obviously you're going to be concerned. And obviously, the two are related about roughly something like 70, 75% of the core PCE is actually just passed through from the core CPI. So those to me are really the, at least in the US, are the two main metrics that you want to focus on.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think there are basically two main measures is the way that I really look at it. There's obviously the CPI, then there's the Fed's preferred measure, the core PCE. Are there other measures that you can look at, absolutely? But typically they tend to be kind of variations on those two. The trim mean and the median CPI and the median PC are just variations and different ways to kind of approach those same baskets. And maybe you're taking some of the volatility out from the top and the bottom, but you're really sticking with those two main baskets. Which one you want to really focus on? I think it depends. If you're the Fed, they've already made that decision for us. It kind of makes it easy. We're going to be focusing on the core PC if you're thinking about monetary policy. But obviously for the markets, what matters is the CPI. And what matters is the CPI because that's what it goes into pricing tips. So it sort of depends on.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“The last year, it's not clear that the Phillips curve really works. And I think Powell's kind of ditched that approach. And it's kind of back to the old adage of saying, you know, we'll know it when we see it and we'll kind of wait for the whites of the eyes of inflation before we decide to move on policy.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Hard to say, I think the thing is that the feds, their time horizons are really, if you think about it, is essentially about three years, right? We get about three years of forecast from the Fed within the SCP. And so if you're thinking about inflation changing over 10 years or 15 years, that's less of an issue for the Fed. So can the Phillips curve work accurately for them within a three to five year horizon? Sure. And there are times that it has actually performed relatively well. So for example, kind of the late 70s when you ran regression sort of these using output unemployment gaps, Phillips curves actually turned out to be kind of useful. But the Fed will always tell you that they have a suite of models that they look at. They will look at everything from core inflation to trim means and median CPIs. So I don't know that they're as reliant on the Phillips curve as they used to be. And I think they've kind of spelled that out for us over the course of.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“CPI has been between one and a half to two and a half percent for the last 20 years. Those types of models that are what we call naive models work quite well because if inflation has been around that for the last 20 years, pretty good odds that for the next year it'll be somewhere in that range But that persistence varies in the short run, it varies even within a decade. And so trying to capture that kind of time-varying nature of inflation persistence is really what everyone's striving to do. And that's why certain models perform really well in certain decades. And they completely collapse in the next decade.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that's exactly what it is. It's just a constantly evolving process. And one way to think about it is that if we're trying to forecast it, and let's say we just want to think about where it's going to go over the course of the next year, there are all sorts of approaches you can take in terms of modeling. But some of the simplest approaches actually work the best, which is simply to say that if I want to forecast inflation over the course of the next four quarters, I might just use the average of the last four quarters. And most often than not, that will actually perform better than trying to come up with some models that, you know, Phillips curve type models, for example. Because inflation persistence is actually a pretty big key, I think, in trying to understand the dynamics within inflation. And that persistence is, it varies across time. And that is one of the keys really in trying to think about it is if I were to tell you that the core”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“Process over, let's say, the last several decades, you sort of try to understand it based on where you are, I think, in the cycle.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source
“I think the shorthand answer to that is no. All you have to do sort of look at the fact that there's a massive academic literature that's basically just devoted to forecasting inflation and coming up with various types of models to figure out what the inflation process is. And there's an equally large literature talking about why we're so bad at forecasting inflation. So I don't know that there's a cogent theory. It seems to sort of change based on where we are kind of in the cycle. And there's different ways of approaching how you want to forecast inflation. There's sort of the top-down modeling approach that a lot of academics use. And I think sort of what's more kind of in favor now, something that I started doing well over 10 years ago, which was kind of more of the bottom-up approach to forecasting inflation. But ultimately, I don't know that there's a cogent theory that really can explain the inflation.”
2021-09-02 · Odd Lots · Omair Sharif Explains How Inflation Measures Really Work · IDENTIFIED FROM THE TRANSCRIPT · source