Thursday, May 18, 2006

What Inflation?

Oh yeah! That inflation.
[...]
The way the government computes the CPI has created a distortion that made inflation look tame when home prices were soaring, but is now making inflation look worse as price gains moderate. It's all because the government measures everyone's housing costs -- renters and homeowners by looking at rents, not at the cost of owning. [...]

Housing prices do not figure directly into the CPI data, Vitner explains. The government recognizes that homes are not only shelter, but assets that add to individuals' wealth, just as stocks and bonds do.

To measure just the value of the shelter services and not the long-term value of owning the asset, the government essentially assumes that homeowners rent their homes to themselves, so it computes an implied rent called "owners' equivalent rent" by asking them how much their house would rent for.

Owners' equivalent rent "is a deeply unsatisfactory measure because it is a price that nobody actually pays," said Jan Hatzius, chief economist for Goldman Sachs.
[...]
Read the whole article and pay close attention. It will explain to you exactly where they've been hiding the salami for the last six plus years of double-digit real estate asset price inflation. Now, with the housing market cooling down, they're going to be desperate to find a new orifice in which to hide the salami.

You're invited to guess in the comments forum where the salami will go next.

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