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'We need to snap out of it': The Fed is being misled - again - by inflation numbers, says professor behind popular recession predictor

By Aarthi Swaminathan

The Federal Reserve has achieved its goal of getting inflation under control, even if the official gauge shows otherwise, Duke finance prof says

The U.S. Federal Reserve is being misled by inflation data and is potentially making a big mistake, a professor who developed a widely used recession indicator told MarketWatch.

Campbell Harvey, a finance professor at Duke University who developed the yield-curve recession indicator, said that the consumer-price index doesn't accurately reflect price changes and that the Fed should not rely on it to make policy decisions. Doing so could derail the U.S. economy, he said.

"It is simple to me. Inflation is already within the 2% preferred range," Harvey told MarketWatch in a phone interview. "Their policy of 'wait, wait, wait, then drip, drip, drip' greatly increases the chance that we fumble the soft landing that everyone wants. The Fed should cut sooner rather than later."

On Tuesday, the federal government released the consumer-price index report for January, which showed that shelter inflation - which refers to the cost of rental units, homes and hotels - rose 0.6% on a monthly basis and was up 6% over the last 12 months.

The Fed's measures of inflation are heavily weighted toward shelter costs, which include not just home prices based on sales, but also the amount of rent that owner-occupied housing could fetch if it had tenants. Shelter represents about 40% of the core CPI reading.

Private-sector data about housing costs tell a different story than the CPI data does. For instance,'s measurement of asking rents found that rent prices have dropped for eight months in a row, according to Danielle Hale, chief economist at

According to Harvey, inflation data collected by the government is "stale" because it lags behind data from private sources by as much as a year. One company that tracks rent inflation said its measurement shows changes in rents a few months before they show up in CPI numbers.

"The real-time data is what we should be basing our decisions on," Harvey said. "Shelter inflation is not 6%. I don't know anybody that would believe that it is 6%."

The real-estate industry is puzzled by the CPI data. "One big source of stubbornness to further calmness is that housing shelter inflation is rising at 6%. That's a bit of a mystery since apartment rents are no longer rising and single-family rent growth is at low single-digits," Lawrence Yun, chief economist at the National Association of Realtors, said in a statement.

Not relying on more current data has significant implications for monetary policy and the direction of the U.S. economy, Harvey said. When the Fed hiked interest rates last year, Harvey told MarketWatch that the central bank could potentially lead the U.S. economy into a recession because of its reliance on an outdated inflation gauge. So far, the recession that many economists predicted hasn't come to pass.

The Fed has a target inflation rate of 2%, but the CPI showed that the cost of living rose 3.1% over the last 12 months.

"All the hikes in 2023 were justified by inflation being outside the comfort zone. ... It's the same mistake and we know that higher rates are not good for economic growth," Harvey said.

"It increases the cost of capital, it means less investment, it means higher borrowing costs. All of this is anti-growth," he added. "So we need to snap out of it."

Harvey pioneered the idea that an inverted yield curve is a recession indicator, with the curve's inversion showing the yield on three-month Treasurys rising above the rate on the 10-year Treasury note BX:TMUBMUSD10Y. Longer-term Treasurys typically have higher yields than shorter-term U.S. government debt, and the inversion of that relationship historically has predicted economic contractions.

-Aarthi Swaminathan

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.


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02-13-24 1530ET

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