How the Government Deliberately Understates Inflation as Rents and Housing Costs are Soaring

It’s hard these days to worry about inflation amidst a maelstrom of voices claiming that there isn’t enough inflation to begin with, and that the world will end if prices stop rising for a moment. Whatever inflation we may encounter in daily life, whether for healthcare, tuition, beef, gas, or cars, we’re told not to worry about it because the higher prices are either annulled by an elegant scheme called hedonic regression, or they’re only temporary, or the amounts are too small to impact the overall budget.
But when it comes to housing, which now accounts for 33.6% of what Americans spend [What’s Draining American Wallets? Interactive Chart], none of these excuses fly. Because inflation in housing has been red-hot.
Actually, it hasn’t been red-hot, the way the Bureau of Labor Statistics measures it. Its CPI contains two housing components: Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent). They purport to measure the cost of ‘shelter,’ which is the ‘consumption item’ that a home provides and is thus included in CPI. The cost of the home itself and any improvements to the home are considered an investment, not consumption, and therefore not part of CPI.
Owners’ equivalent rent accounts for 23.83% of the CPI and rent for 5.93%, for a combined weight in the CPI of about 30%. It is by far the largest and most important component.
Inflation in these two categories was contained, as they say at the Fed. In July, owners’ equivalent rent rose 2.7% and rent rose a minuscule 1.0%.

This post was published at Wolf Street by Wolf Richter ‘ September 12, 2014.

 

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