Inflation rising? Not if you count housing prices

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.

About Andrew Kantor

Andrew is VAR's editor and information manager, and -- lessee now -- a former reporter for the Roanoke Times, former technology columnist for USA Today, and a former magazine editor for a bunch of places. He hails from New York with stops in Connecticut, New Jersey, Cincinnati, Columbus, and Roanoke.
This entry was posted in The Buzz. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *