Wednesday, April 27, 2011

Housing CPI Bizarre

This picture shows the housing component of inflation (blue line), compared to house price changes (red line). As housing prices went through their bubble, the effect on CPI didn't budge much from 3%, whereas the recent crash brought it down to zero. See Dr.HousingBubble for more.

Things like oil, corn, and gold have skyrocket recently, but I'm told that things like clothing, 'food away from home' and 'shelter' are keeping inflation low. Perhaps. But I'm with Bill Gross, who highlights the gov't dilemma given its true debt-to-GDP ratio is 500%:
Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies--inflation, currency devaluation and low to negative real interest rates.


Anonymous said...

Since when are investors in cash entitled to a risk free profit?

What a whiner!

Anonymous said...

Doesn't this have anything to do with the misleading "owner's equivalent of rent" housing component of the CPI?

NPHard said...

To me this just means that housing prices are more unstable but oscillate around the CPI. I think if you take this back to the early 1990s you will see the same thing.

Anonymous said...

It's "Owner's Equivalent Rent."

To Anonymous #2:

It's only "misleading" if you (1) don't understand that they use it instead of a house price index like that the OFHEO, and (2) don't understand WHY they use it. Go to to the specific *.gov website and download/read their papers on the subject.

We could argue whether the theoretical idea behind using OER is correct, but it wouldn't do any good to argue that point until you understand their reasoning behind using it, so I won't argue that point at least until I read something that suggests familiarity with their argument for using it. :-)

The use of OER instead of house prices is "inflating" CPI currently, i.e., making it appear HIGHER than it truly is (at least for that cohort which is purchasing new housing at the moment).

Some bloggers like HoltRitz at the Pic Bigture were complaining for many years (2005-2008) that use of OER was "deflating" CPI at that time. Well, now the shoe's on the other foot.

Over the VERY LONG TERM (a decade or more) the OER and the overall price of homes should track together very well.

BTW for those that RENT their homes, the use of OER is unquestionably more accurate than using the price of purchased housing stock.

It can be argued that, for those who own their homes outright or have fixed-rate mortgages, there IS NO HOUSING COST INFLATION because their housing price is FIXED. Except, of course, for incidentals like property taxes, insurance, and maintenance.

Dave said...

How is "food away from home" keeping inflation low? Vanilla sundaes at our local McDonald's are at $1.29, up from $0.99 a couple of years ago. Just one example, but I'm sure you'd find plenty more if you look for them.

Then there's also the matter of driving "away from home". Gasoline prices are higher now than when oil hit $149 per barrel in '08.

Anonymous said...

"Gasoline prices are higher now than when oil hit $149 per barrel in '08."

true locally but not using national averages.