'00s, '90s, alan greenspan, alternative cpi, alternative economics, cpi, demand-pull inflation, economic boom, economics, federal reserve, gdp, housing bubble, housing bust, inflation, jake huneycutt, real gdp
Back in April, Floyd Norris of the New York Times wrote one of the most insightful articles I have encountered all year. He decided to look at CPI if home prices continued to be included in the index after 1983. This, of course, requires a little bit of explanation.
Prior to 1983, the US Consumer Price Index included housing prices. A change was made at that time, however, to replace housing prices with a concept called “owners’ equivalent rent.” The rationale behind this change was that CPI should not include “investments” and home ownership was both consumption and investment. “Owners’ equivalent rent” was measured not by housing prices, but by rental prices given up by the homeowner in order to occupy the unit. In this way, it was hoped to strip out the “investment” related aspect of housing, while still holding onto the consumption aspect of it.
Unfortunately, this minor change in the way CPI was measured has had dramatic results on the end product. It’s created a situation where the Federal Reserve and other government actors are looking at one set of statistics to measure inflation, when the economic reality can be completely different. This is not to suggest that there is a conspiracy to engineer the statistics, as some have argued. Rather, a minor change in methodology has merely changed the way we perceive things in a detrimental fashion.