Inflation Is Already Below 2% When This 'Fiction' Metric Is Stripped Out, CME Economist Tells Benzinga

BY Benzinga | ECONOMIC | 11/17/23 03:37 PM EST

Owner equivalent rent (OER) makes up 25% of the headline inflation, and it’s a “fiction.” Strip it out and the headline CPI rate drops below 2%.

“I don’t like taking things out of CPI, but this one’s a fiction,” said Bluford Putnam, chief economist at CME Group. “So if you take it out, we’re below 2%, and we’ve been below for three months – we’re already below the Fed’s target.”

Putnam appeared on Benzinga’s PreMarket Prep on Friday and said it was nonsense that OER was such a predominant metric in the headline inflation count.

“Are you telling me you rent your house to yourself, you pay yourself the money and that money gets counted in personal income statistics and, supposedly, you can spend it? Give me a break, that’s not going to happen.”

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Economic Slowdown

“We’re in great shape on inflation and the market, over the last two or three weeks, has realized that inflation is not the issue – we’re not going back to six or seven percent,” Putnam said.

“But the Fed doesn’t buy this story I’ve just given you. It’s looking at core inflation still between 3% and 3.5% – so they could keep rates higher for longer,” he added.

What the markets should be worried about is a slowdown in the economy, now the post-pandemic recovery has played out, Putnam said. He expects much slower growth in the labor market next year and, if rates remain higher for longer, a slowing in corporate profit growth.

He illustrated the latter, explaining that during the 1970s and 1980s corporate profits, as measured against nominal GDP, remained fairly flat, then rose sharply during the Greenspan and Yellen Fed years of low interest rates.

“That era is ended,” Putnam said.

Volatile Markets

Thus, markets are likely to remain volatile, with factors such as wars in Ukraine and the Middle East adding to global uncertainties.

“I’ll give a yellow light for equities. Bond yields are lower so you buy equities – the yellow light is because the economy and profit growth are slowing, so be slightly cautious.”

So which equities? The clue from Putnam came as he dismissed the budget deficit as a concern, but said government expenditures were important.

“Most spending is on defense, military spending, and 90%-95% of that is spent in the U.S. – so it’s stimulative in 2023.”

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Watch the interview with Bluford Putnam on Benzinga’s PreMarket Prep below:

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Photo: Shutterstock

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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