The CPI doesn't appear to reflect the increases in housing across America, which is the average family's largest cost
the largest single component (nearly one-third) of the CPI is shelter. and the largest component of shelter is owner-equivalent rent, or what the BLS figures your house would rent for. OER and housing-price changes used to be similar to each other, but OER started lagging in the late 90s. you can read all about it here: newyorkfed.org
What facts show the CPI is correct?
none, it's just one system and it has a history. however, if one is to consider housing-price rises to be "inflation", then they cannot simultaneously be considered part of financial wealth. as it stands, the lack of inclusion of housing-price appreciation in the CPI makes it possible to include residential RE as part of household wealth.
this is rather important, since the majority of households have no wealth other than their house. in fact, total household wealth recently exceeded the top hit in early 2000, and not because the Nasdaq went back to 5000 when you were asleep. no, it's all thanks to the RE boom for "enriching" Americans these past few years.
so you could say that home equity doesn't count as wealth, any more than automobile equity or washing-machine equity does. this would make it possible to include the 20%/annum housing-bubble appreciation in the CPI. but household wealth would also basically disappear except for the wealthiest 5% of the population.
so a policy decision to count housing prices would be very bad for the govt on several accounts:
* it would make Americans look MUCH poorer
* it would make the CPI appear higher
* it would make CPI-linked govt obligations (e.g., COLA) more expensive
so is there any wonder why they don't include them?
but these things aside, there are other factors as well which indicate housing price rises are not simple inflation. first and foremost, homeownership is now at a RECORD HIGH.
theoretically, if the real cost of a good increases, demand for it should drop. however, it is QUITE CLEAR that housing demand is now at an ALL TIME HIGH.
it is as if people started lining up around the block to buy H2 Hummers (8 mpg!) when gas costs $10 a gallon.
so consumer behavior is not consistent with the inflationary interpretation of housing. in fact, in case after case, the "hotter" the RE market is in a city, the more desperate people are to buy, paying well over asking and getting into bidding wars and such.
this kind of behavior cannot be understood as a consumer response to "inflation". however, it can easily be understood as "dumb money" chasing the blowoff top of a housing bubble. because this is just what the same johnny-come-latelys were doing chasing Internet stocks in March 2000.
so, while one can have different opinions on these matters (for my own purposes, i do not consider housing as part of my "net worth"), in some tangible sense, the treatment of housing as an asset or a cost is "in the eye of the beholder". and most of the eyes in America today seem to treat housing as an asset.
so, while i perceive other problems with the CPI, its exclusion of housing i see as no more problematic than its exclusion of stocks. |
