Hello Fed, Inflation Is Rampant And Obvious, Why Can't You See It?

Year-over-year home prices are up 11.2%, some cities even more. The Fed does not see this or count it if they do. Let's discuss why.

Home Prices Rise at Fastest Pace in 15 Years

Home prices are running rampant. The national level average year-over-year increase is 11.2%.

Prices have accelerated in the past few months. I discussed the year-over-year acceleration in Home Prices Rise at Fastest Pace in 15 Years

National and 10-city averages do not tell the full story as the lead chart shows. 

Inflation Disconnect

CS National Top 10 Metro CPI OER 2021-01

Owners' Equivalent Rent

OER stands for Owners' Equivalent Rent. 

Prior to 2000, home prices, Owners' Equivalent Rent (OER), and the Case Shiller national home price index all moved in sync.

This is important because home prices directly used to be in the CPI. Now they aren't. Only rent is. 

Yet, OER is the OER is the Single Largest Component of the CPI with a weight of 24.07%.

In effect, economists substituted rent for home prices in the CPI. Prior to 2000, this did not matter. Now it seriously distorts measures of inflation.

The rationale is home prices are a capital expense not a consumer expense. 

What Should We Measure?

What is it we are measuring or need to measure? 

I suggest we need to measure inflation, not just consumer inflation. 

Home Prices, OER, and CPI Percent Change

CS National Top 10 Metro CPI OER Percent Change 2021-01

Year-Over-Year Percent Changes

  • National Home Prices: 11.2%
  • 10-City Average: 10.9%
  • OER: 2.2%
  • CPI: 1.4%

The CPI allegedly is up a mere 1.4% from a year ago as of January 2021. Let's calculate inflation by substituting home prices for OER in the CPI as it used to be.

I call the result CS-CPI for Case-Shiller-CPI.

CPI, CS-CPI National, CS-CPI Top 10

CPI, CS-CPI Percent Change 2021-01

Economists claim inflation is up a mere 1.4% year-over-year as of January 2021. 

If we substitute home prices for OER as it used to be (and is far more accurate as well), inflation is up 3.8% from a year ago. 

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