Jim Grant on how interest expense was removed from CPI in 1983

"The Cost of Money Is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly," a scholarly paper published in February by the National Bureau of Economic Research, examines the source of the paradoxical detachment of consumer sentiment, which registered 79.4 on the University of Michigan survey (down from 101 on the eve of the pandemic), from GDP growth, which, in the fourth quarter, printed at an annual rate of 3.4%.

The authors' search leads them to a 1983 overhaul of the Consumer Price Index that eliminated interest expense from the cost of living.  Add it back, and today's inflation data look more like the double-digit shockers that may have cost President Jimmy Carter the White House in 1980.

[...]

"When interest paid is considered as a cost borne by consumers and included in the CPI," write the authors, who include former Treasury Secretary Lawrence H. Summers, "the year-on-year inflation rate increases by one percentage point throughout [2023].  When both personal interest payments and the cost of homeownership are accounted for in the CPI, the [year-over-year] inflation rate increases from 3% to 9% in November..."

~ Jim Grant, "Consumers on the couch," Grant's Interest Rate Observer, April 11, 2024