Thursday, June 29, 2006

OER Distorting the CPI?

Deja-vu, from the Star Ledger:

Debating how inflation is measured

Talk about inflation and economists are quick to complain that the Consumer Price Index, the Federal Reserve's chosen measure of inflation, made inflation look artificially tame these past few years when home prices were soaring.

But now, economists are once again faulting the CPI, saying the index is making inflation look worse than it actually is now that home prices have started to simmer down.
The CPI number, which is calculated and published once a month, is designed to track the price of a hypothetical basket of goods people buy. And since housing is the biggest expense for most Americans, housing costs are a huge part of the Consumer Price Index; nearly 40 percent of this hypothetical basket of goods revolves around "home sweet home."

But since 1983, the government has measured everyone's housing costs -- renters and homeowners alike -- by looking at rents, not at the actual cost of owning a home.

To determine what the government calls the "owner's equivalent rent" component of the CPI, the BLS tries to answer this question: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

The problem with this methodology, say economists, is simple: In the last eight years, as home prices have risen by almost 50 percent in real terms, creating more than $5 trillion in real estate wealth, rental rates have stayed mostly flat or even fallen -- one reason the housing boom hardly nudged the CPI all these years, said Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

The problem is the housing bubble, not the OER calculation. Housing prices and rental prices will typically move together, except of course, when you've just gone through the largest asset bubble in history.

Caveat Emptor!


Blogger RentinginNJ said...

This leads back to the question, “should the Fed’s mandate of ‘price stability’ also include asset prices”? If it did, perhaps we wouldn’t be in this situation today.

6/29/2006 07:15:00 AM  
Anonymous Anonymous said...

Sorry this is OT, but hope baby boomer (and all boomers) read this - talk about grim:

6/29/2006 07:23:00 AM  
Blogger Richie said...

Financial irresponsibility..

I really didn't start putting anything towards retirement until I was 25. I started working full-time at 20, so I missed a good 5 years of retirement savings.

I made up for it in the past 6 years, but in any case, people need to start thinking while their younger.

Tax free savings that gains interest is a wonderful thing.

6/29/2006 08:12:00 AM  
Anonymous Anonymous said...

CPI is a lie.

6/29/2006 08:15:00 AM  
Anonymous Anonymous said...

Agreed, CPI is bogus. But OER was part of the equation to keep CPI low the past few years. No one can cry now that OER is rising and driving inflation higher.

6/29/2006 07:03:00 PM  

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