Larry Summers Isn’t Second-Guessing the Government on Inflation

Interest payments aren’t counted in the inflation rate. This is a fact that a lot of readers find confusing, if not angering, especially now, when rates are high on mortgages, auto loans and credit cards. I get lots of mail from people saying the absence of interest rates from the Consumer Price Index seems like sleight of hand by the government, the economics profession or both.

So I probably won’t win a lot of friends by saying that I think the way the government economists do things is correct. But when they’re right, they’re right.

I’ll grant that higher interest payments do feel just as inflationary as higher prices for ice cream, bowling balls and haircuts. People hate paying more interest. Dissatisfaction with high interest rates and the unavailability of consumer credit explains why consumer sentiment is worse than would be expected given current levels of inflation and unemployment, Lawrence Summers, the former Treasury secretary and Harvard president, wrote in February in a working paper with three other economists.

There is, they wrote, “a disconnect between the measures favored by economists and the effective costs borne by consumers.” Their paper was titled, “The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly.” Inflation would have hit 18 percent in 2022 if the government had calculated it the way it did before 1983, including mortgage rates, they found.

You might be surprised, then, that Summers is not arguing for the Bureau of Labor Statistics to put interest rates in the Consumer Price Index. “I don’t think the purpose of the C.P.I. is to predict people’s sentiment,” he told me this week. “The purpose is to measure the cost of goods and services.”