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Fed and CPI missing housing inflation yet again: The CPI is completely missing the increase in housing prices.
doctorhousingbubble.com / May 23, 2015
The most widely used measure for inflation is the Consumer Price Index (CPI) put out by the Bureau of Labor and Statistics (BLS). Nearly a decade ago I discussed how poorly a job the CPI did in measuring home price increases while they were happening. In fact, during the raging housing bubble the CPI only measured moderate increases in home prices. Why? The measurement looks at something called the owners’ equivalent of rent (OER) that essentially considers what your home would rent for versus your actual housing payment. So you could be paying $3,000 in a mortgage, taxes, and insurance but the actual rent would be something like $2,000. That is a massive differential. In the LA/OC market, this measurement did a horrible job. The argument of course is that rents eventually catch up and we are seeing some of that now. Yet Fed policy and other government decisions are made on the basis of the CPI and miss big changes by years. The latest CPI report is now showing this inflation creeping in but of course, it is late once again. And this is important to address because the largest component of the CPI is housing costs.
The problem with the CPI and housing
Housing makes up over 40 percent of the CPI tool which is a by far, the biggest component. So wouldn’t you want this instrument to accurately measure home value changes? We now have plenty of tools that can give a better indicator of home price changes like the Case-Shiller Index. There has been large pressure on home prices recently thanks to many years of slow home building and a lack of inventory. We also had the interesting phenomenon of investors diving into the market since the crash and being a dominant force.
The post Fed and CPI missing housing inflation yet again: The CPI is completely missing the increase in housing prices. appeared first on Silver For The People.
Source: http://silveristhenew.com/2015/05/23/fed-and-cpi-missing-housing-inflation-yet-again-the-cpi-is-completely-missing-the-increase-in-housing-prices/
