With real house price inflation based on market data, total CPI would have jumped by 3.7%. Lift the cover on the deception to keep the CPI low.
By Wolf Richter for WOLFSTRAAT.
For most Americans, housing costs are the largest item in their budget, ranging from 30% to 60% of their total monthly spending. In its Consumer Price Index (CPI) for February, released yesterday, the Bureau of Labor Statistics reported that the cost of home ownership (which the BLS calls “Owner’s equivalent rent”) increased by just 2.0% year-on-year. , and that rents (“rent of primary residence”) increased by 2.0%. It is the largest among the 211 items in the CPI basket and together they make up about one third of the total CPI. They play a big role in CPI. So …
Rental inflation averaging 2.0% year-on-year in the U.S. could be around target, according to what I can see in other rental data. But homeowners’ inflation of just 2.0%, given rising house prices? Ridiculous. In its latest version, the Case-Shiller National Home Price Index rose 10.4%.
This discrepancy between house price increases and the CPI for homeowners – which for many years has helped to underemphasize the overall CPI – is shown in the graph of the Case-Shiller National House Price Index (red line) and the CPI for an equivalent residence rent ”( black line). I compare the homeowners’ CPI at 100 for January 2000 with the Case-Shiller index, which is set to 100 by default for January 2000. Allows you to see the progress of both indices on the same axis.
The thus adjusted CPI increases by 3.7%.
The “owner’s equivalent rental house” is 24.2% of the CPI. If it had risen by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the total CPI would have risen by 2.03 percentage points. more. So add the 2.03 percentage points to the reported overall CPI increase of 1.7%. And the thus adjusted overall CPI would have shot up by 3.7%!
During housing, the Case-Shiller index, after five years of falling, briefly joined the CPI for homeowners before rising again – and there is a reason for that.
The S&P Case-Shiller House Price Index is a good measure of house price inflation because it is based on the “selling pairs” method, which compares the price of a house when it was sold in the current month with the price of same house in previous transactions years ago. It is also responsible for improvements and removing outliers. In other words, it measures how many dollars it takes to buy the same house over time – and with that, it measures house price inflation.
This discrepancy – in fact a form of deliberate deception – between the actual home price increases and the CPI for home ownership has been regretted before and is not a secret. But it is not widely discussed in the media, so everyone knows how much the homeownership component in the CPI underestimates the real inflation of homeowners facing Americans.
To its credit, the BLS includes housing costs in the CPI basket. On the other hand, the EU does not keep homeowners’ costs in its basket under the Harmonized Consumer Price Index (HICP) at all. This only includes rent. And so housing costs are unfortunately under-represented in the EU’s inflation data.
The rationalization that the BLS argues for this contradiction is that it does not make house prices relevant to inflation. It considers homes as an ‘investment’ and investments do not come into the CPI. What it does try to price is the cost of ‘shelter’, which is a service. It makes sense with rent. A tenant pays for a service. But the BLS extrapolates this rent-as-a-service to home ownership. And this is where the logic quacks.
The BLS inflation data for housing is based on the ‘consumer expenditure survey’ sent to consumers, rather than market data for prices and rents. The homeowner had to decide what their primary home would be for rent, and he tried to rent it out.
This is the question in the survey: “If someone were to rent your house today, how much do you think it would rent for monthly, unfurnished and without electricity?” So homeowners should come up with a figure.
For the CPI, says the BLS, the shelter cost of the house is “the implicit rent that residents have to pay when they rent their houses.”
This explains the black line in the table above that is completely out of line with the reality of home prices: it monitors rental inflation, not home price inflation, and it essentially represents what homeowners think rent would be. Thus, the rental CPI, which accounts for 7.8% of the total CPI, and the homeowner CPI, which accounts for 24.2% of the CPI, measure approximately the same: rent. And that excludes turbulent house price inflation neatly and purposefully from the index. And it also turns CPI into the sad joke it is.
Sustainable goods inflation + 3.3%. Food inflation + 3.4%. Inflation of services is rising, but is still being kept under pressure by battered plane prices, lodging, event tickets, and so on – until people start traveling again and going to events. Read … The dollar’s purchasing power is declining. Fed gets his wishes
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