In "Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator," Philippe Bergevin points out the CPI has not usefully reflected the rapid run-up in housing prices in recent years. He proposes a new official inflation indicator for monetary policy purposes that would better reflect the prices of houses sold in the market.This is an interesting idea. Especially since, imagine a time when there would be two CPIs: a high one for owners at the peak of the bubble and a lower one for renters. Wonder if that would get people to notice sooner that prices are out of line with fundamentals.
"The use of assumed prices for dwellings rather than actual prices for houses and the inclusion of a mortgage interest component make the CPI less sensitive than otherwise to housing price changes," notes Bergevin. The main concern, he adds, is that the CPI's insensitivity to housing could potentially cause the central bank - reassured by its imperfect indicator that inflation is under control - to keep rates too low for too long.
Thursday, September 13, 2012
Two CPI proposal, one for owner-occupiers
What Really is Happening with Housing Prices? The CPI Won't Tell You - C.D. Howe Institute