Another New York Times article today, also by Floyd Norris, shows the effect — or, rather, lack of effect — of housing prices on inflation.

In “If Home Prices Counted in Inflation“, Norris reminds us that today’s Consumer Price Index doesn’t take home prices into account — the Bureau of Labor Statistics uses a number (“owners’ equivalent rent”) that’s based on the cost to rent, not buy.

image[3]So all through the housing bubble, the low inflation rate we all read about wasn’t reflecting skyrocketing real estate prices. And all through the burst it hasn’t been reflecting crashing real estate prices. (See the snippet from the Times’s chart on the right.)

For example, from October 2010 through January 2011, house prices dropped 12.4% nationwide, but the “owner’s equivalent rent” figure went up 1.5%.

So now, Norris points out, the Fed is starting to get antsy about inflation creeping up — the Consumer Price Index is up 2.8% — when, if home prices were included in the CPI it would have dropped 0.7%.

Numbers are tricky little beasts. It’s easy to look at them and draw conclusions, but if your assumptions are wrong it doesn’t matter how good your calculator is.