1/6 Yesterday I learned that BLS produces experimental price indexes for new vehicles, cars and trucks. Published indexes show annual inflation at ~11%, but these experimental indexes show annual rates of 19% to 21%. bls.gov/cpi/research-s… #EconTwitter
2/6 Some background: to create the CPI, the BLS combines price changes into ‘lower level’ indexes, like Chicago eggs or New York apples. A national all-items index can be formed as a weighted average of the LL indexes. The CPI-U uses weights taken from a single time period;
3/6 the chained CPI uses weights from two time periods, allowing changes in behavior. Usually these changes are responses to changes in relative prices, in which case the chained CPI shows lower inflation than the CPI-U
4/6 The price changes in published LL indexes come from surveys of prices conducted by the BLS. The experimental indexes use microdata from JD Powers. This allows BLS to apply to individual prices the same formula that the chained CPI applies to LL indexes.
5/6 This means they incorporate changes in behavior.
But what we see isn’t a response to prices because the experimental indexes for vehicles are above the published indexes. Rather, it appears that buyers are leaning in to models with increasing prices.
6/6 This suggests that inflation (for cars at least) is strongly driven by demand increases rather than supply shortages.

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