With real house price inflation based on market data, the overall CPI would have increased by 3.7%. Raising the hood of deception to keep the CPI low.
By Wolf Richter for WOLF STREET.
For most Americans, housing costs are the biggest item in their budget, ranging from 30% to 60% of their total monthly expenses. In its February Consumer Price Index (CPI) released yesterday, the Bureau of Labor Statistics reported that home ownership costs (which the BLS calls “equivalent rent from the homeowner”) increased by just 2.0% in compared to the previous year, and that rents (“principal residence rent”) increased by 2.0%. They are the largest items among the 211 items in the CPI basket and together account for about a third of the overall CPI. They play an important role in the CPI. Then…
The 2.0% year-on-year rental inflation on average in the US may be approximately on target, as I can see in other rental data. But the real estate inflation of only 2.0%, due to the skyrocketing house prices? Ridiculous. In its latest version, the Case-Shiller National Home Price index jumped 10.4%.
This discrepancy between house price increases and the CPI for homeowners – which for years contributed to underestimating the general CPI – is depicted in the Case-Shiller National Home Price Index graph (red line) and the CPI for “equivalent owner rent. residence (black line). I set the owners’ CPI at 100 for January 2000 to match the Case-Shiller index, which is set by default at 100 for January 2000. This allows you to see the progression of both indices in the same axis.
The CPI thus corrected increases by 3.7%.
The “equivalent income from the owner’s residence” represents 24.2% of the CPI. If it had increased by 10.4%, in line with the Case-Shiller index, instead of 2.0%, the overall CPI would have increased by 2.03 percentage points most. Therefore, add 2.03 percentage points to the overall reported CPI increase of 1.7%. And the overall CPI thus corrected would have increased by 3.7%!
During the housing crisis, after five years of decline, the Case-Shiller Index briefly joined the CPI for homeowners before taking off again – and there is a reason for that that we will see in a moment.
The S&P Case-Shiller Home Price Index is a good measure of house price inflation because it is based on the “peer sale” method, comparing 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 removes outliers. In other words, it measures how many dollars it takes to buy the same house over time – and therefore measures inflation in the price of the house.
This discrepancy – in fact, a form of deliberate deception – between real increases in house prices and the CPI of home ownership has been regretted before and is no secret. But it is not widely discussed in the media to let everyone know to what extent the component of home ownership in the CPI underestimates the real inflation of home ownership that Americans face.
To your credit, the BLS includes costs of ownership in the CPI basket. In contrast, the EU does not include home ownership costs in the basket underlying the Harmonized Index of Consumer Prices (HICP). Includes rent only. And therefore, housing costs are woefully underrepresented in the EU’s inflation data.
The rationale presented by the BLS for this discrepancy is that it does not consider house prices relevant to inflation. He considers the houses an “investment” and the investments are not included in the IPC. What she tries to put a price on is the cost of the “shelter”, which is a service. This makes sense with rent. A renter pays for a service. But the BLS extrapolates this rent as a service to the home itself. And this is where the logic fails.
BLS real estate inflation data is based on the “Consumer Expenditure Survey” sent to consumers, rather than market data for prices and rents. It is up to the owner of the house to decide how much his main residence would rent for him, as they tried to rent it out.
This is the research question: “If someone rented your house today, how much do you think they would rent a month, without furniture and without light?” Therefore, homeowners need to discover some values.
For the CPI, says the BLS, the cost of sheltering the home occupied by the owner “is the implicit rent that the occupants of the owner would have to pay if they were renting their homes.”
This explains the black line in the chart above that is completely out of step with the reality of home prices: it tracks rental inflation, not home price inflation, and essentially represents what homeowners think rents would be. Therefore, the rent CPI, which represents 7.8% of the total CPI, and the owner CPI, which accounts for 24.2% of the CPI, measure approximately the same thing: rents. And this, therefore, clearly and purposefully excludes rampant house price inflation from the index. It also turns the CPI into the sad joke that it is.
Inflation of durable goods + 3.3%. Food inflation + 3.4%. Service inflation is rising, but still controlled by spending on airline tickets, accommodation, event tickets, etc. – until people start traveling and going to events again. Reading… The dollar’s purchasing power decreases to another record low. Fed is fulfilling your wishes
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