Independent CPI numbers

[Finster]

Re: Independent CPI numbers

and that's why it's called a CONSUMER PRICE index. it's a measure of CONSUMER PRICES!!:rolleyes:

Yeah, yeah, yeah, you and I both know that, and even the BLS generally stops short of calling it an index of "inflation". But it’s commonly taken as the sine qua non of inflation itself.

Not to mention it’s being used that way in many contexts. Income tax brackets. SS payments. And … even the so-called "Treasury Inflation Protected Securities" are indexed to … the CPI!

… you are abolutely right that the cpi is too narrow a measure. at least i think so. the monetary powers, on the other hand, appear to truly believe that other forms of inflation are not their purview.

And this is why they so regularly get it wrong. Inflation is popular when it’s affecting things like stock and house prices, not so popular when it’s affecting gasoline and bread prices. But they’re not different forms of inflation, just the same inflation affecting different prices at different phases of the cycle.

… owner's equivalent rent is precisely the tool to separate out the cost of current use of the house from the house's value as an asset.

when my family was younger, we used to vacation for 2 weeks on martha's vineyard, renting a house. occasionally, i would do the math- calculate an approximate rental income over the 10-12 weeks a year such a home could be rented and compare it to the real estate values i could see in the listings in the martha's vineyard gazette. as you can easily imagine, the real estate prices never made economic sense.

i was indeed a renter, and you could have included the cost of the rental in my personal cost of living. but let's say, for argument's sake, that the owners reserved 2 weeks in august for their personal use, and that otherwise they only visited the place off-season when the rental value was zilch. how do you calculate the value of their consumption/use of their vacation home? the income they are foregoing is precisely the rental value for the two weeks they use it in august. isn't that value precisely the "cost" of using it for those two weeks? and aren't the real estate taxes, maintenance costs, etc better accounted for in their role as investment property owners?

So why not apply precisely the same (faulty) logic to all prices? Look! Let’s pretend I’m just renting my car! My furniture. My college education. My beer.

This little exercise in reducio ad absurdum has a point. You can cause "inflation" to go to zero by the simple exercise of cutting interest rates to zero. Print an infinite amount of money to keep them there. The price of everything can go to infinity and my payments to zero.

At the end of the day, there is no fundamental difference between a house as an asset and a commodity. It just happens that the purchase price of the house is generally so large in relation to most other things that we amortize it over many years. We pay rent on the money rather than the dwelling. Not incoincidentally, the market tends to arbitrage the rate of rent on dwelling and money because people have a choice. It is a well known phenomenon in real estate that cap rates - the ratio of rent to price - tracks interest rates. Therefore, the selfsame inflationary effect of lowering interest rates also lowers the ratio of rent to price in the housing market - generally by raising the denominator. Set that aside, look only at the numerator, and presto! No inflation!

Of course this can't last forever. The net effect of OER is to add lag to the CPI. You've probably heard analysts comment lately that OER is "artificially" goosing the CPI because rents are rising (no concidence, following interest rates) while house prices are soft. Many of the same voices, rather hypocritically, were silent a couple-three years ago when OER was artificially depressing the CPI. What this boils down to is they apparently prefer the use of OER while it subtracts from inflation readings, and actual prices when it adds. Meanwhile, analysts, possibly including the Fed itself, wind up chronically behind the curve, thinking inflation is lower than it is when it's rising, and higher than it is when it's falling.

Horrible.

[jk]

Re: Independent CPI numbers

So why not apply precisely the same (faulty) logic to all prices? Look! Let’s pretend I’m just renting my car! My furniture. My college education. My beer.

your car, your furniture, your college education, and most especially your beer are not treated as assets because they are not traded like assets. further their consumption makes them less valuable, especially the beer. houses are "consumed" via residence, yet maintain and usually increase their [nominal] value. further, there are individuals and institutions that use housing as an investment vehicle. that is not true of your beer. your reductio ad absurdum doesn't fit.

as for the lag, the hypocrisy of those complaining about the current effect of o.e.r. increasing cpi, the fact that cpi is a lousy measure of inflation, of course i agree.

[Finster]

Re: Independent CPI numbers

your car, your furniture, your college education, and most especially your beer are not treated as assets because they are not traded like assets. further their consumption makes them less valuable, especially the beer. houses are "consumed" via residence, yet maintain and usually increase their [nominal] value. further, there are individuals and institutions that use housing as an investment vehicle. that is not true of your beer. your reductio ad absurdum doesn't fit.

Traded like assets? So we go from reductio ad absurdum to petitio principii?

From allegedly invalid to actually invalid?



The rest of your argument trades on illusion. In fact, houses are consumed like the rest. I suppose you'd only know that if you ever replaced roofing, flooring, plumbing, electrical hardware, etceteras. The only truly durable portion is the land it sits on, and in the final analysis you never fully own it either, since you pay property tax and effectively rent it from the government. Net net, the "appreciation" boils down to depreciation of the dollars you're using to measure that value with, as you acknowledge in conceding that is "nominal" in nature.

Hence, you merely affirm my contention that the house price reflects inflation and ought to be used in the CPI without being dumbed down by government bureaucrats.

The mere fact that people aren't generally concious of the fact that it is not really an appreciating asset doesn't make it any less so. It is NOT an "investment", but a consumption item (as many are relearning the hard way these days). Moreover, even assuming arguendo it to be an asset, that does nothing to detract from the fact that its prices are reflective of inflation, and that use of OER in the CPI basically inserts interest rates into the equation. The Fed's highly inflationary interest rate cuts of 2001-2004 cut cap rates by raising house prices (i.e. cutting the value of the dollar relative to houses) while leaving monthly payments and rental rates flat. Then in 2004 it begins to take its foot off the inflationary accelerator and rents then begin to play catch up with house prices and the latter in due course soften. Yet the picture portrayed by the OER component of the CPI inverts this relationship by indicating nonexistent inflation while it was rampant and then escalating inflation when it was cooling down.

Do you really think this better represents reality? An index that indicates benign inflation when it's soaring and accelerating inflation when it's slowing down?

If indeed the CPI were never used for anything but a pure cost-of-living measure (whatever the heck that would be good for), it wouldn't be so horrible. But it's not. As pointed out above, it's used as an "inflation" escalator for, inter alia, billions of dollars of so-called "inflation" protected bonds. What's more it leads to repeated policy errors because the Fed itself follows it. Not only directly, but through those very "inflation" indexed bonds. One of the reasons they were originally advocated in fact was to give policymakers at the Fed an indicator of "inflation expectations".

But for the foregoing reasons, it just turns out to be a horrible one...