Real Interest Rates
Real interest rates are the difference between measures of inflation and what the interest rate the Fed sets in bank policy.
Rates are at or near record negative levels.
Three Extreme Measures
- CPI: -6.73
- PCE: -5.65
- Housing Adjusted CPI: -9.23
Housing Adjusted CPI
Home prices are not in the CPI. In lieu of direct measures of housing prices, the BLS uses Owners’ Equivalent Rent (OER).
OER is the single largest component in the CPI with a weight of 24.26%.
I calculate a housing-adjusted CPI by substituting the Case-Shiller National Home index for OER.
The latest Case-Shiller data is for October.
CS National , Top 10 Metro, CPI, OER, Percent Change
Percent Changes Year-Over-Year (October)
- Case Shiller National: 19.07%
- Case Shiller 10-City: 17.04%
- CPI: 6.22%
- OER: 3.13%
- Primary Rent: 2.70%
Whereas national home prices are up 19.07% (down from a record 19.96% two months ago), OER is up a mere 3.13%
Case-Shiller Home Price Index
Huge Disconnect
Economists vs Human Beings
The average person would look at the above home price charts and scream “Inflation”. In contrast, the average economist sees nothing at all.
The distinction comes about because homes are allegedly not a consumer item. Martians buy them.
More accurately, the average economist considers homes a capital expense that has nothing at all to do with inflation.
I understand the economists’ point of view, but I am concerned with “inflation” not alleged “consumer inflation”.
Do Housing Prices Belong in the CPI?
A housing-adjusted CPI is not a perfect measure of inflation and it may not even be a good one.
However, it’s a better measure of inflation than pretending prices are only going as measured by Personal Consumption Expenditures (PCE) or the CPI.
Bad Things Happen
The Fed’s preferred measure is PCE. For November, PCE is up a mere 5.7% year-over-year.
Bad things happen when the Fed ignores asset bubbles. And the way to ignore asset bubbles is to pretend housing, land prices, speculation in Bitcoin, and insane stock market valuations are not inflation.
It’s difficult to state the inflation effect on stocks or Bitcoin but housing is one most human beings easily see even though the Fed and Martian economists can’t.
Thanks for Tuning In!
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