Hypocrites, Inflation, Housing

Keep your eye on the hypocrites as they begin to selectively cherry pick WMD intel inflation data.

They are out in full force. These frauds have been begging — BEGGING — the Fed to stop raising rates. Their rationale? The CPI is overstating inflation,  thanks to the owners equivalent rent.

The recent market damage came from the crowd’s belated realization that these empty no-inflation arguments were as hollow as the heads of those who had been making them. 

If it wasn’t so sad, it would be funny.

Let’s review how this happened: Over the past few years, as inflation built up a full head of steam, we have warned — repeatedly — that CPI grossly understated inflation due to the Owner’s Equivalent Rent. OER  added a mere 2% to the inflation basket,
and at a third of the core rate of CPI, it articifically made inflation
appear low. If we used more accurate reality based data, say the
OFHEO’s measure of actual home owning costs, then that housing portion of
inflation would have been up as  high as 14% year over year.

We referenced charts, pointed you to other sites, highlighted economists who got it, flogged the issue relentlessly. We even helped convince in our small way the NYT to run an article on this. That was ignored by a bevy of hacks, charlatans and soothesayers, all cooing that inflation was non-existent. (Excepting, of course, for everything going up in price).

Now, a selective group of shills and montebanks are coming out of the woodwork to proclaim — once again — that there is no inflation, due to OER.

Sorry, you have not earned that privilege.

If you did not discuss the impact of OER on CPI as housing ignited and ran higher, then you are hereby barred from using it on the opposite side of that mountain. Failure to comply with this edict will result in endless public ridicule and humiliation. (I will personally see to it).

~ ~ ~

On the opposite side of the honesty fence, here are my two favorite commentors on the subject of inflation and/or OER. These are people who have been in front of much of the crowd on these subjects, and deserve to be singled out as credible and intelligent.

Joanie, the Penobscot Princess, observes:

"Look. Here’s how this works with the OER. The elite won’t be hip to this, but
they can follow along vicariously. What do the overwhelming majority
want to know when shopping for a house, eh? Bingo. Monthly nut. Period.
They don’t care what the sale price is, the rate, the terms, nothin’.
Just tell me the amount I need to pay come the 1st and lemme’ outta’ here. Sad, but unfortunately, true.

So when money is so
loosey-goosey that on a monthly basis (a/k/a paycheck to paycheck) it’s
cheaper to own than rent (despite the soaring price of the asset), OER
dies on the vine and drags CPI. Conversely, when money gets more
expensive/tighter (despite any softening of the price of the asset)
more folks turn to renting as this becomes their sole option; buying a
home is now out of monthly reach.
When this happens as the numbers are implying at the moment, OER can
accelerate, boosting CPI. In this oversimplified way, the cost and
availability of money is dictating the slack or the tightness in the
rental market. Dig? The BLS is only attempting to measure the cost of
keeping a roof over your head on a monthly (rental) basis.
They are not in the business of assessing whether the underlying asset, the house, is appreciating or depreciating."

And my favorite pure Inflation comments of the past few days conmes from Jeff Matthews says: "D’oh! Inflation!"

"Given the bond market’s shocked—shocked!—reaction to yesterday “core” inflation news, you’d think nobody on Wall Street does any of the following:

Buys gasoline, food or clothing.
2. Rents cars.
3. Buys airline
4. Stays in hotels.
5. Eats out.
6. Eats in.
7. Pays
college tuition.
8. Goes to a doctor, a dentist, or a lawyer.
9. Has life
insurance, health insurance, or property and casualty insurance.
10. Pays
property taxes.
11. Goes to a psychiatrist.

I continue to be astounded by the intellectual dishonesty in this portion of economics . . .

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  1. Mark commented on May 20


    Yes, it’s being trotted out already. I heard one of the bulls on CNBC use the argument yesterday. I had the same reaction as you. “That knife cuts both ways Boys”. To her credit, the interviewer was prepared and asked about the counter argument. He dissembled. I wish I could recal what idiot it was. And no the interviewer was certainly not Maria Bartiromo.

  2. PC commented on May 20

    You post quoted the following:

    Actually the June 06 T-Note futures contract closed down only 8 ticks on 5/17/06 after the CPI came out. Hardly shocking reaction. T-Note then rallied next day and recouped all of its losses is now in the process of a counter trend rally

    The German Bund, which trades in the same direction as the T-Note, reacted even more positively. It went down by 0.55 on 5/17/06 after the CPI came out and successfully re-tested the 5/12/06 closing low. The next day, the Bund rallied and recouped all of its CPI induced losses and is now also in a counter trend rally.

  3. Steven commented on May 20

    I strongly disagree with you here Barry.

    I don’t think the OFHEO Measure of Housing Costs is reliable indicator of inflation. It only indicated a housing speculation frenzy.

    Owners Equivalent Rent on the other hand is more fundamentally driven.. Has there ever been a renting bubble? People dont usually drive up the rents in speculative frenzy. So I think it is a more reliable indicator and should be faithfully followed.

    Ignoring this and allowing rents to ratchet up by rationalizing “they cant afford houses anymore so they’ll rent”
    And discounting the relevance of OER will truly drive up inflation expectations in the future..

    People CAN ALWAYS fall back on renting when theres a speculative rise in housing, but they cannot easily run from higher RENTS and therefore demand higher pay..
    You wont have to ridicule them Barry, the Bond market will … you know.. do its thing…

  4. Barry Ritholtz commented on May 20


    Its not that I am enamored of OFHEO’s view on inflation —

    Rather, I wanted to point out the folks who denied the impact of OER when it was understating inflation, but now use it when it serves their purpose.

  5. john commented on May 20

    Ok- even though I often say “there is no inflation” I really mean “there is no inflation”. But then again I’m not an economist (obviously). But here’s what I don’t understand about the whole deal – if prices are rising because more money is being pumped into the economy via m3 – then why are commodities going down in price?

    Or is the fact that housing has fallen off taken the pressure off commodities and is causing them to decline? If that is the case the very factors that cause inflation (the raw materials of “stuff”) are now deflating – this suggests (to me anyway) that by the time it (inflation) is discovered the problem is already solved.

    Remember the 70’s weren’t a time of inflation but of stagflation. And that is something this human never wants to live through again. The current Fed tool box is full of tools used to attack that problem – the fact that the problem has changed is significant.

  6. Barry Ritholtz commented on May 20

    Cause prices dont go straight up, and they occasionally retrace their gains partially.

    Oil went from $15 to $75. now its are $68

    Gold went from $250 to 715, now its $659

    Copper went 40 cents to $4.00; now its $3.60

    Are you implying this pullback is evidence of no inflation?

  7. D. commented on May 20


    Obviously people see what they want to see!

  8. Big Al commented on May 20

    Nice neologism, soothesayer

  9. me commented on May 20

    Frankly, I don’t understand why this is part of core inflation. If you remove this volitile measure……………..

  10. calmo commented on May 20

    So now that rents are creeping back up and making an impact that starts to reflect the actual housing costs, how long before they revise their view on how to price the housing component of CPI to maintain the skewer?
    The graph illustrates the lack of political will to address this problem over the last 5-6 years –a record of dishonesty and frankly, mendacity. Any effort to defend the OER given this record and given the complacency, deserves to be scorned.

  11. Robert Cote commented on May 20

    Thursday, February 09, 2006
    Measuring #2: Rents
    …The CPI includes 23% as owners equivalent rent. OER is a construct put together to undereport inflation. It assumes that even as you actually pay $3500 in PITI monthly you are only paying $2000, the amount the same property would rent on the open market. I fully expect the Fed to change the OER just in time to catch the slide in housing and thus continue to underreport inflation.

  12. angryinch commented on May 20

    Joanie says that folks are buying home b/c cheap financing has lowered the monthly nut so much that owning is less expensive than renting. In what parallel universe is this true?

    In most of the hotsy-totsy markets—Fla, Az, LV, Wash DC, Calif, etc—renting is FAR less expensive than owning, almost no matter what sort of toxic financing you use.

    Where I live in CA, rents are roughly 40-50% of net ownership costs, even factoring in the most generous of tax assumptions.

    The reason folks are/were buying is because they ASSUMED prices would continue higher and, therefore, asset inflation would bail them out of the buy/rent conundrum.

    If/when housing prices flatline or decline, or rather when that perception takes root, there is simply no rational economic reason to pay 2x your monthly nut to own vs. rent.

    I understand that the differential b/w owning and renting is still relatively narrow in many U.S. markets. Those markets aren’t the problem. It’s the markets—which represent a large % of U.S. housing volume and market cap—where this differential is out of whack that are the issue.

  13. RW commented on May 20

    I don’t know how ‘right’ this is but I have been trying to distinguish cyclical trends from secular trends and it seems we are end of cycle now (where commodities typically fall off) but still in a secular inflationary trend. This may have been conteracted by labor arbitrage globally but that seems less a factor now that the Asian middle class is growing and a shortage of skilled workers is developing. Money is seeking shelter but there is a lot of speculation too, particularly in copper IMHO, so some of the ‘shelters’ money has found could collapse. If this were a normal cycle one would expect capex to start the next run but I sure don’t see much sign of that in the US – lots of corporate profits but they seem to be going elsewhere or just nowhere, sitting there waiting for god knows what – so where’s the capital growth going to come from?

    The real estate market may have been an additional source of money but it’s not clear to me that adding more money to the system is the central issue now. In any case, if the hotter markets are flattening and those who have bought investment properties can not receive enough rent to offset their costs then the point may be moot; there is little choice other than to keep leveraging and/or using what would otherwise be free cash to keep the monthly mortgage ball rolling.

    I guess what I’m trying to get at is that it seems to me you can only do so much by pumping money into the system, at some point it needs to be doing work beyond just supporting prices.

  14. B commented on May 20

    The key is the future not the past. If one was driving through the rear view mirror of every prior bubble, we’d be at Dow 100,000 and copper at $500/oz by now. Asset inflation is living large right now. Interest rates have hit a secular trough and are not likely going lower over time. No one disputes that. But, enough cracks are showing up that it is worth a pause. Some of the recent economic data shows us falling off of a cliff. Now, it could recover quickly but, it might not. So why risk piling on until more future clarity is available?

    The Fed can always do what Volcker did. 200 basis points at a pop if we see wild wage inflation and housing go to new highs. In 1973, copper and gold were at blow off highs as well. And so was housing. But the Fed kept jamming rates……..but they had wage inflation. And we may yet.

    If the business cycle is nearing an end, and there is anecdotal evidence to suggest it might be, we will see commodities and assets fall over time. But, no one would have found that data in 1973 by looking at what copper or oil did the month before. If hindsight shows that we are headed to a significant slowdown, housing crisis or even a deflationary mess of astronomical proportions, history will label the interest rate hawks as fools. It just isn’t that easy.

    One final point. Equivalent rents are now going up. That is what is driving alot of the inflationary data now. So, just as equivalent rents were underestimating inflation when housing was headed through the roof, equivalent rents are now overestimating inflation. And raising rates are causing this. ie, As the Fed raises rates, housing becomes more “unaffordable” than it already was with asset prices going through the roof. So, as the Fed raises rates, less people are able to afford a house. So, they chose to rent. This creates more demand in the rental market and prices go up. Yet, at the same time, housing is deflating. So, while this shows inflation is increasing, how is inflation really increasing when house prices are coming down or even cratering in many markets? THE FED IS CAUSING HIGHER EQUIVALENT RENT BY RAISING RATES and creating more demand for rentals as housing craters. It is not indicative of inflation. That is, unless one believes housing is still going up with equivalent rents. And there is zero data to support that premise.

    Lakshman Achuthan, Anirvan Banerji and Paul Kasriel seem to be calling for Fed restraint here. Some very, very savvy economists who tend to be more bearish or at least pragmatic in their historical interpretation of data. I’m not saying who is right but I think an alternative consideration is worthwhile if we are teetering on the precipice.

  15. wcw commented on May 20

    One, in re, “[h]as there ever been a renting bubble?”: yes.

    Sure, prices in desirable locations never get so high that (with apologies to Yogi Berra) nobody can afford to rent there any more, but neither do prices of residential property. The denouement in rents is very similar to the settling of housing after a runup eases. Not unlike homeowners, landlords do not want to believe market values can possibly adjust downwards. They hence are loathe to drop rents, preferring move-in “bonuses” or similar baubles.

    Rents in the entire San Francisco Bay Area, which had been high due to tight conditions for years and which the tech bubble had pushed pretty hard, have gone approximately nowhere for five years now.

  16. jm commented on May 20

    OFHEO’s statistics understated home price inflation during the bubble, because they cover only single-family home resales (no condos, coops, etc.) where the mortgages were bought/securitized by Fannie Mae or Freddie Mac. Also, they exclude those where the loan was insured/guaranteed by a federal entity (FHA, VA, etc.). (http://www.ofheo.gov/hpifaq.asp)

    Note that this means they include only SFH resales involving loans below the FNMA/FRMC limit, which was just $359,650 in 2005, and therefore don’t reflect any of the condo or McMansion madness, and in the main bubble areas have included only the least expensive part of the resale market.

  17. royce commented on May 20

    Barry, I agree with your points on inflation, but you also risk going too far on housing costs. The boom in housing prices has not been uniform in the U.S., which doesn’t seem very inflationary to me. If a dollar is worth less now than it was, why isn’t it worth less everywhere? Another issue is that a house is both shelter and an asset, and we generally don’t think of a rise in an asset price as inflationary. Now, if housing prices drop 10-20% next year, will that be a deflationary sign or just the return of rationality to the markets?

  18. adam commented on May 20

    The only number which really matters is nominal wage growth, which is easy to measure. Consumers certainly can’t borrow any more, so only higher pay packets would allow them to bid up prices.

  19. alan commented on May 20

    Inflation in housing is not everywhere, but inflation in most markets make up for those that haven’t inflated. Yes, housing is an asset and does not represent savings because for someone to cash out his house requires someone else’s savings or more likely someone else’s debt. And just like every other asset, house prices can fluctuate. If housing doesn’t flatline for at least 3 years, I wonder if the Fed will be able to prevent stagflation from escalating into something worse.

  20. Lord commented on May 20

    It will be too attractive for the government not to redefine OER now. I think they will weight rental cost changes by the percentage renting and owners cost changes by the percentage owning and still place price changes over cost as investment returns. It will then show higher past inflation, but hey, that’s all in the past.

  21. fred hooper commented on May 20

    First, it’s obvious to me that many of you are really smart people, but please allow me offer my simple-minded view on inflation and other things related to money.

    The FRB has created massive amounts of dollars using something called inter-bank lending and fractional reserve lending. Dollars are borrowed (debt), circulated at a really fast rate (velocity), and invested at nominal rates of return (compounding). As a result money grows like weeds in the spring. This is inflation. Prices go up on everything because they can, and because there is too much money chasing everything.

    Over time, investors and institutions seek to maximize returns by speculating in various market sectors such as technology companies, real estate, stocks, bonds and commodities. Bubbles occur, then they pop. This is natures way of redistributing the money to more deserving, smarter people. Pretty soon, the really smart people have all the money and many of these people are crooks, but that’s off topic.

    Anyway, I think that inflation occurs because the really smart people want it to occur, but they want you to believe it isn’t occuring, so you will work really hard to collect worthless dollars (fiat money), and so you’ll be able to pay all of your bills (bills that always go up, not down) and credit cards (debts).

    By the way, back in the good old days (the 70’s-80’s), I think they used the median price of a new single family home to calculate CPI. It was only after the CPI got too high that they (the really smart people) decided to come up with something else (some rent thing), to reflect the housing component. I think they did this because retiree’s COLA’s were pegged to the CPI. This was the first in a series of adjustments (broken retirement promises) made by the government and really big corporations, and in some cases, crooks, but that’s off topic.

    Since I myself understand the complexities of compound interest, I’ve always wondered how many dollars there would be if all dollars that were ever created or printed were to be compounded at a mediocre rate of 5% to 8% over a period of 35 years (since 1971). I’ll bet it’s a hellava lot of money, but I don’t feel like calculating. In any case, I’ve heard that if you took all of the dollars, and all of the yen, yuan, pesos and all of those other currencies created by the really smart people in other countries, and you threw them into a big pot, and reallocated their currency to them in the form of historic old money (gold), you’d get about one ounce of the stuff for every $18,000 you threw in. I find this all so confusing. My head is throbbing, so I’ll stop now and go pour myself some refreshments (Scotch) even though it’s not yet officially noon in my time zone I see that the post above is at 2:26 pm, so I guess it’s okay.

    In closing, the next time some bozo (really smart person) tells you that there is no inflation, I hope you’ll take my advice and punch them in the nose. Thank you.

  22. DavidB commented on May 20

    If this were a normal cycle one would expect capex to start the next run but I sure don’t see much sign of that in the US – lots of corporate profits but they seem to be going elsewhere or just nowhere, sitting there waiting for god knows what – so where’s the capital growth going to come from?

    To their credit I believe a lot of corps. have been plowing their cash into reducing debt loads and shoring up years of bad balance sheets. As the available cash begins to grow though I have to believe that employees will start demanding more of it. Especially as workers get scarce with the upcoming boomer retirement.

    If a dollar is worth less now than it was, why isn’t it worth less everywhere?

    Scarcity(or excess) will always seek out the weakest link in the chain. It is never uniform. When a dam breaks the water goes through the holes and seldom takes the whole dam apart. There will always be a few portions of the wall standing. Money velocity, like water, will seek out the path of least resistence. That’s why it has been fllooding China and India(and Chinese and Indian bank accounts) for years with no significant notice

  23. fred hooper commented on May 20

    Oh, and another thing I forgot to mention: Maybe, just maybe, the Fed will decide to bail out the housing industry, and prices of houses will double (again) in the next 3 years. If houses double in price in three years, wouldn’t that be inflation??

  24. royce commented on May 20

    David B:

    “Scarcity(or excess) will always seek out the weakest link in the chain. It is never uniform.”

    Then why aren’t we seeing arbitrage between the value of dollars in California and say, Michigan? Seems to me the value of the dollar is the same in both places. Just in one place it buys more housing than in the other place.

  25. JS commented on May 20

    “Inflation in housing is not everywhere” Really? Looks like most places to me:

    Or if you don’t like the selective underestimating bias in OFHEO data or want more recent data, look here:

    “That is, unless one believes housing is still going up with equivalent rents. And there is zero data to support that premise.” Really? Consider the links above and the link below:

    It’s tough to argue that the housing data doesn’t look very inflationary, even if a slowdown appears to be on the way with slowing sales and rising inventories. The rate of home price appreciation is slowing down in numerous areas and has even had slight yoy price declines in a very few areas, but that is not overall deflation, it is still annual home price inflation in most areas. Shelter is the largest expense most people face, and with across the board pervasive and undeniable inflation in shelter, the economic consequences are going to be serious.

    Inflation denial and the bizarre fixation on explaining away conspicuous evidence are not sound financial sense. Thanks Barry, for taking people to task for this.

  26. royce commented on May 20


    I looked at the link. If you go to the tables listing MSAs, there are MSAs and regions that haven’t seen large increases. That doesn’t mean we’re not in a housing boom, nor does it mean there isn’t a 5% rate of inflation overall, but as I said earlier, you can overstate the relationship between inflation and house prices.

    “Inflation denial and the bizarre fixation on explaining away conspicuous evidence are not sound financial sense. Thanks Barry, for taking people to task for this.”

    I specifically agreed with most of what Barry said on inflation, so why you have this bizarre fixation on being a dick is beyond me.

  27. B commented on May 20

    Ok, I can’t read your link JS. You’ve found some place where the rate of growth in prices is slowing but that they haven’t actually peaked. Very debatable. And also depends on whether it is reported as nominal or seasonally adjusted. Twisted data. NARI wants to put a happy face on the data. Example below.

    “It turns out that Massachusetts real estate has seen year over year price declines every single month between September 2005 and February 2006 inclusive. While the Massachusetts Association of Realtors officially states that February 2006 was the first time in several years that there have been year over year declines, that is only true in nominal terms. Seasonally adjusted values have been declining for half a year now in real terms.”

    Are you so confident of the future of housing prices that you are loading up on real estate? lol. It is not a secret that homes have not peaked in all markets. But, taken in context, that is nothing more than historical data. More rear view mirror analysis. Another market where NARI is twisting the data just so happens to be Phoenix. Done a peekaboo on housing inventories in Phoenix? My point is that this is a very, very precarious time. Why push higher rates when Robert Schiller has recently said this is the biggest bubble in American history? Is it worth raising rates looking in the rear view mirror if things could be so precarious?

    So, I take it your argument housing will continue to rise in price for the foreseeable future because of inflation? Is that your argument? Do you believe we will see wage inflation, which is necessary for sustained asset inflation? The exact peak in different markets will not occur simulataneously but I would buy that housing will continue to rise in prices if you can show me markets where inventory is not rising. Forget about the pricing argument because everyone wants to manipulate that data point. Phoenix, about 4,000 units a few months ago to 45,000 units today. Miami, 3,000 condo units to 40,000 and rising today. San Diego condo prices off 30%. Even Columbus, Ohio where homes for sale are near an all time high…..and rising. Hardly bubble territory. Yet, prices are off 15-25% in some areas in Columbus. I don’t care to continue typing but it is every city in the nation. Obviously not the same in Cleveland where housing is 2x wages versus San Fran where it is 10x wages. Even the little depressed town my parents live in is seeing huge inventory builds. Or maybe that every single home builder’s stock is down 50-70%, which is predicting market action 9-12 months for now. Or the consumer stocks which have been in a lower high, lower low trend for half a year or more signalling a slow down in consumer spending?

    I appreciate a stimulating debate. But don’t give me historical data. There are still alot of doofus’s out there who haven’t heard a thing about a housing “situation”. They’ll continue to support markets a while longer but the housing bears have been squawking for years. There was no corroborating data. Now there is. So, unless supply, demand and price elasticity of demand are no longer valid, it isn’t the rearview mirror you should be looking at. It is all of the undeniable evidence that housing is peaking(ed).

    I’m willing to alter my point of view if you can present a reasonable argument. I’d like to hear a well reasoned positive outcome because I don’t want to see any of this come to pass.

    Scroll down to the news links at the bottom of this page and look at the news links Come talk to me in nine months. If you are right, I’ll buy you a Montecristo and an airplane ticket to Canada so we can smoke them legally.


    Those who don’t heed history……..


  28. DavidB commented on May 20

    Then why aren’t we seeing arbitrage between the value of dollars in California and say, Michigan? Seems to me the value of the dollar is the same in both places. Just in one place it buys more housing than in the other place.


    That is precisely the point. The value of dollars is lower in California(which also means prices are higher there) because that is a more desirable place for people to live. Thus supply and demand wil naturally drive the price of houses higher.

    As the boomers retire and age we will see the same thing, and in fact are seeing the same thing now, in the medical industry. That’s is why there should be greater pressure on health care worker’s wages to rise than say pre school teachers.

    Money will flow(lose it’s value thus requiring more of it to purchase goods) where the demand for goods or services is higher. That is why up in Canada the oil region in Alberta is seeing 20% and 30% housing price growth(due to the oil boom) while in Eastern Canada prices are barely growing at the national average as the manufacting region struggles under a high Canadian dollar and weaker exports to the US

  29. Robert Campbell commented on May 20

    Several of you have made the correct point about whether housing prices can continue to rise: it’s all about wages and incomes.

    It’s as simple as that. Anybody who thinks home prices that have risen to 2 x historical income norms in many of the bubble markets are stable and permanent is living in a fool’s paradise.

    Heck, with job outsourcing, real wages have fallen in the last two years.

    These imbalances need to be corrected, folks. Either housing prices come down or wages must go up … way up. I know where I’m placing my bet.

  30. Mr. Beach commented on May 20


    Where are the bond vigilantes? Why aren’t large players fleeing bonds? When the Fed held rates at 1%, why did 10-year yields fall as well? Clearly inflation was going to enter the system.

    The answer? Hedge funds and carry trades. As long as the Fed pushes ‘transparency’, there is money to be made by borrowing on the short end and lending long.

    ‘Transparency’ may be great in academia, but in the real world, transparency is the poker equivalent of showing your cards and then attempting to bluff.

    Is BB really this naive?

    In a transparent world, the markets will always front-run the Fed. That is capitalists do with information. Transparency is the equivalent of impotency for the Fed.

    Inflation and inflation premiums are all entirely meaningless in a transparent world. Who the hell cares what inflation will be in 3 years — we can always hedge around by front-running the transparent Fed.

    My wild ass guess: BB is going to viciously tested by the market in the next 6 months. First up in June will the Fed’s unlisted 2% inflation target. Rapidly following that will be the dollar. Finally, the final exam: stagflation.

  31. D. commented on May 20

    Maybe BB talked to Maria on purpose… to be more enigmatic!

    Transparency has shrunk, hasn’t it?

  32. D. commented on May 20

    “Greenspan, in his first public U.S. speech since retiring in January from a storied tenure leading the Fed, predicted there is no danger of a total collapse of the housing market.”

    Should we be analyzing every word? What does he mean by total? Does he believe in a partial collapse? Or maybe he’s so incredibly convinced of inflation that everything will go up but real esate for a while!

  33. Steven commented on May 21

    16% trimmed mean CPI is supposed to be the most accurate inflation measure long term.

    Check it out yourself with this customizable chart from the Fed’s site


    I’ve noticed the 16% trimmed mean CPI is usually the halfway point and more stable line when you compare the history of these 3 data sets: CPI-All items, CPI-Less Food/Energy, and 16% Trimmed mean CPI.

    Suprisingly the 16% Trimmed is still pretty low for this last month. Maybe its a signal inflation is going to suprise to the downside next month.

    I’m always playing with the charts from that site, its really interesting

  34. muckdog commented on May 21

    I think Barry and many others have this inflation thing backwards. With rising energy costs draining money from consumers and rising rates causing monthly payments to increase, I’m more worried about deflationary forces. The economy has slowed. Will it be a soft landing or a recession?

  35. equalizer commented on May 22

    The apologists are already pointing out that the Personal Consumption Expenditures (PCE) is the preferred Fed inflation index. Housing eqlt index in CPI is 35-40%, while in PCE it is 25-30%. [I’m having a difficult time finding exact numbers. Anyone know exact numbers?]

    “While we think that the homeowners equivalent rent component is likely to boost the core [consumer price index] this year, it is important to note that housing (shelter) has a smaller weight in the core personal consumption [PCE] price index than it does in the core CPI … This is an important point because the FOMC’s preferred measure of core inflation is the PCE index rather than the core CPI.
    — Joshua Shapiro, MFR Inc.

  36. dsquared commented on May 22

    I don’t think I ever wrote a word about this on the way up, but if anyone had asked me I would have; OERs should not be part of any price index targeted for policy purposes. This is for two reasons:

    1. Rents actually charged are definitely consumption. Imputed rents on owned housing are partly the result of consumption decisions and partly the result of investment decisions. It is extremely conceptually different to separate the two and during a period of housing speculation (when by definition, investment psychology is changing with respect to the housing market) the proportion is not even likely to be stable. There are big conceptual problems with treating imputed rents as consumption.

    2. Related to this, the actual imputed rents calculations done are really unsophisticated and in my opinion produce user cost of housing numbers that aren’t worth the paper they’re printed on.

    It would be really nice to have a reliable, good series for user cost of owner-occupied housing, but it isn’t going to happen, so any policy measure of inflation ought to just use rents actually paid and rely on quasi-arbitrage to keep the two broadly in line. This is more or less what’s actually done in the UK and euroland.

  37. Barry Ritholtz commented on May 24

    A quick hypocrite alert:

    David Goldman, chief fixed-income strategist for Cantor Fitzgerald, points out that the uptick in the CPI is quite unlike the 1970s and 1980s rises, which the Fed could readily lean against. Paradoxically the headline inflation numbers are being jacked up by deflation.

    About one-third of the CPI is accounted for something called owner’s equivalent rent. In this “mystical, occult process,” government statisticians try to figure how much you’d charge to rent your house to yourself. But with house prices on the decline and mortgage rates on the rise, this deflationary impulse to the economy shows up in a higher CPI, Goldman explained in a conference call to clients. Elsewhere, the “shoeshine and haircut” sort of services, which can’t be readily outsourced to Bangalore, are showing relatively tame price increases, he notes.


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