The standard is no longer the standard…

The White House is desperate to show that inflation growth is slowing. With a presidential election coming up in 2024, the administration needs to prove it has a handle on rising prices.

After all, one of the best ways to get kicked out of office is to have a lousy economy. So, you have to change the game. And with a metric like inflation, the outlook won’t change overnight… It takes at least a year.

That means the White House is going to use any trick it can – including lowering the bar for the Consumer Price Index (“CPI”).

You see, the U.S. Bureau of Labor Statistics (“BLS”) recently changed its methodology for the CPI. And that change will increase the chances for inflation to cool even more… at least, by the numbers.

Make no mistake – this is a political move. But for investors, it’s a long-term win.

Let me explain…

Inflation and rising interest rates are bad for people’s disposable income. When prices rise, you have to save money for your needs… by putting less of it toward your “wants.” Plus, higher rates mean that home, auto, and credit-card loans will cost more.

If people have less money to spend, economic growth will suffer.

The White House doesn’t want that. But it doesn’t control the Federal Reserve – the institution that sets interest rates.

Even though the Fed was established by an act of Congress, it’s considered an independent agency. However, the BLS is part of the U.S. Department of Labor. That gives the administration a chance to act.

Now, the White House knows only one of two things will make consumers happy: Either the Fed has to stop raising interest rates, or inflation has to come back down.

The administration might not be able to change interest rates… But it can change the standard for inflation to drive it lower. And by doing so, it can kill the Fed’s interest-rate hikes.

The White House hasn’t said this. But it’s likely one reason why the BLS announced a change to its CPI methodology late last year…

The CPI spending weights for different items are now calculated based on a single year of spending patterns. Before, the BLS used a two-year blend… Under the previous method, the weightings for this year would have been based on a combination of 2019 and 2020 data.

But now, this year’s weightings will be based on spending habits in 2021.

Over time, this will affect inflation. For example, housing would have accounted for nearly 43% of the index before. But now it will make up 45%.

Housing soared during the COVID-19 pandemic – but as the Fed hiked interest rates, home prices began to cool. Think of it this way… When we see outsized moves due to events like the pandemic, they usually don’t last. Home-price growth will likely get back to its 6% typical average over time.

So, if you’re trying to kill inflation over the next couple years, what do you do? You make sure housing has a bigger impact on the CPI.

Changing the CPI methodology might sound like a dramatic move. But this isn’t the first time we’ve seen this happen. In fact, the last change was in 2002…

Back then, George W. Bush was the sitting president. And he was the one dealing with a struggling economy and upcoming elections.

So, the 2002 White House needed to change how voters saw the economy. It needed inflation growth to stay low so the Fed wouldn’t raise interest rates.

The BLS changed its CPI methodology that year. It adjusted the index weightings from a 10-year spending average to a two-year average. It said it wanted to reflect consumers’ spending habits more accurately. The outcome was a slowdown in inflation growth…

In the 10 years before the change, the average CPI increase was 2.7%. Heading into the 2002 midterms, though, the rate had dropped to 2.2%.

Consumer sentiment, as measured by the University of Michigan, tanked from 2002 into early 2003… But by the time the election rolled around in 2004, the mood had changed. Sentiment soared higher. And Bush was elected to another term as president.

Fast forward to today… Another White House administration is facing another struggling economy. So, it has to change the narrative. And changing the standard for inflation is the quick fix it needs.

The decision might be cynical… But the perception of the economy is about to change. And for investors today, that matters…

The new CPI weightings started with the January 2023 release. The adjustments are underway. It’s only a matter of time before folks start to see the difference show up in the data.

This will take pressure off the Fed to keep raising interest rates, eventually giving the central bank room to cut rates once more. And as we leave the worst of inflation behind, the market can rise much higher.

It might be a political move… But it’s good news for investors.

Good investing,

C. Scott Garliss

Strange change at your bank [sponsor]
At least 41 major US banks have just made a drastic change to the way money in America works. It could have some major implications for you, your money and your retirement. But it's crucial you understand what's happening, before these changes get applied to your bank account. Here's everything you need to know.

Source: Daily Wealth