Is housing hiding inflation in other sectors of the economy?

[spinbaby]

A very important entry from one of my favorite blogs:

Is housing hiding inflation in other sectors of the economy? CPI gives housing a 42 percent weight and this has obscured rising costs in medical care, education, food, and energy. It has also given the Federal Reserve another excuse to digitally print more money.

More--including some great charts--at:

http://www.doctorhousingbubble.com/housing-hiding-inflation-sectors-economy-cpi-housing-growth-in-medical-care-college-fuel/

[dkf]

1. Makes sense.

Thanks.

[FBaggins]

2. Easy enough to find out.

The CPI report breaks it down into dozens of categories. Simply take out the housing component and see what you get.

[Dawgs]

3. You mean the 900 pound gorilla that no one (including the President) wants to talk about.

Housing values has destroyed many people's personal incomes.

[Statistical]

4. Simple to calculate. CPI-W in 2010 increased 1.5% if you exclude housing it increased 2.30%

http://www.bls.gov/news.release/cpi.nr0.htm

Overall CPI-W average is 1.5% in Dec 2010 (year over year).

"Shelter" was +0.4%.
If the housing = 42% fact is correct.

1.5 = 0.42(0.4) + 0.58x
1.5 = 0.168 + 0.58x
1.332 = 0.58x
2.30 = x

Non housing components averaged 2.30%.

[Mimosa]

5. I've seen it for 2 years now

Prices of medical care, drugs, groceries WAY UP!

[Scruffy1]

6. In my understanding housing prices are not used

Since the 1980's they have used owners rent equivalence to filter fluctuations in home value. Hence even though my house value dropped 30% the equivalent rent stayed about the same. I can see that this works both ways, but I think its main feature is to keep COLA raises down in more normal times such as the ten or so years that house prices were rapidly rising. Even more insidious is the treatment of energy and food costs. They are not even considered in the numbers the fed uses or core inflation. Also there is no way to weight quality on the scale so a cheap doodad from China that breaks the first time it is used would not be compared to a quality item that would offer more value. A common dodge is to substitute products to cover up price increases, like chicken for beef.

[pinqy]

7. Not quite

BLS does use owner's rent equivalence, not for fluctuations so much, but to eliminate the investment portion of home ownership and break it down to actual consumption.

Food and Energy are a part of the CPI, but many finance folks like to look at the special index "All items less food and energy" because those two are very volatile. The FED uses the core PCE, which is an index using the same data as the CPI, but reworked with different weights and categories. It's produced by the BEA which uses the all items PCE for their deflator.

And no, substitution is never used to "cover up" price indexes, especially not chicken for beef. The geometric means index used for lower level items (steaks in Seattle, hamburger in Harrisburg, Chicken in Charleston, Apples in Albuquerque etc) simulates some substitution for like items. If the price of ribeye goes up by more than the price of flank steak, people will buy more flank steak and vice-versa. If they both go up 5%, say, the index will show a 5% increase in cost, even though flank steak is still cheaper.

Read Common misconceptions about the CPI, Q&A