CPI is a very distorted view of actual living costs over time. House prices aren't included and we've seen prices balloon over the last decade. Sure, your apples cost the same but good luck trying to buy property.
>House prices aren't included and we've seen prices balloon over the last decade
Depending on exactly what you mean, this is not a great criticism of the CPI.
House prices are excluded on purpose. Housing costs are included (including for housing equivalent to what an owner owns).
CPI does include housing expenses: "The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, *housing*, apparel, transportation, medical care, recreation, education and communication, and other goods and services)." [1]
Furthermore, it includes housing expenses for owner-occupied housing as follows: "The [owners' equivalent rent] index is designed to measure the change in the rental value of owner occupied housing change. In essence, OER measures the changes in the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market." [see p. 107 of [2]]
As the BLS notes, the primary service provided by houses is to shelter the inhabitants. The house itself may be held as an investment. See [3]
So the CPI explicitly captures the cost of providing shelter, though it excludes the investment value of the property.
Thanks for the extra context - I should have been more clear. CPI does capture OER and rental costs as you show.
I get that mortgage costs and the like aren't considered as consumption ( rightly so ) but that makes the measure inaccurate when assessing prices people pay to live day to day. Rental prices are generally a more applicable indicator for most of the population as the BLS says but the rising costs of houses and mortgage costs by extension imo should be captures because it signals how money is flowing.
Is there another metric perhaps that captures both consumption costs and housing beyond rent/rent equivalents?
I think what you're missing is that many people are not paying market price for housing, because they bought their houses a long time ago. If they have mortgages, they were set by the home price when they bought.
CPI is an average. The people who have owned their own homes for years are dragging down the average for the cost of living. You can't get the cost of living that they have if you buy today.
Averages can mislead. It's like the old joke about average income in a room when Bill Gates is in the room.
By changing who is included in the average, it might be possible to construct a CPI that's more relevant to you?
If homebuyers are irrationally paying significantly more than it would cost to rent the same house, then that doesn't seem to me like a valid reason to inflate the indexes.
If homebuyers push prices of housing up and that does increase rents, then it is a valid reason to adjust CPI upward, and they do, AFAIK.
What I'm saying is that many home owners are paying significantly less than it would take to rent the same house, because they bought decades ago.
Though of course there are also those who bought at high prices too.
If you want to know about rents, it would make sense to just look at rents. I wonder how the housing component of CPI would look if there were a survey that was limited to renters?
My understanding is that the index relies on estimates of what homeowners would pay in rent for equivalent housing.
If you think longtime homeowners are paying less, then substituting equivalent rent should push the CPI rate of inflation to be higher than the genuine rate. An overestimate.
So you think correctly calculated inflation is less than the CPI says?
I thought everybody who thinks it is inaccurate thinks it is an underestimate, that the government is covering up inflation being rather high.
Also, if they just didn't survey non-renters, then the result would not include how much homeowners spend on, say, hamburgers or whatever.
> Yep, the new money has flowed into capital assets rather than consumption goods.
Yes, because the wealth has flowed to people who primarily relate to the economy as capitalists, rather than laborer/consumers.
> It would be like saying there’s no inflation because milk prices are steady, ignoring that cows cost three times as much.
So, it would be true, for the purpose for which we have and measure general inflation. It would not be true for certain other inflation measures which are also used, but which aren’t part of (and aren’t relevant to the purposes of) general inflation measures like the CPI
I would argue the statement is true for any significant government or private use of general inflation measures.
But, sure, if you’ve got a case where the CPI is actually used for a purpose and you think a different measure of inflation that incorporated asset prices would be a better replacement for the CPI, please feel free to present (1) the existing use in question, (2) your proposed replacement measure, and (3) your argument for why your proposed replacement is better.
That was the purpose of comparing to cows and milk. For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low).
In the case of a household, those mean that you can't take some of your production, and save it for the future in capital goods -- the same kind of thing that happens when more of your income has to go to the same necessities.
In the case of a central bank, those mean that the injections of money aren't (currently) effective for stimulating economic activity, but are simply causing a wealth transfer and rallies in whatever stores of value remain. That is the same signal it needs to get back as when consumer goods become more expensive: you are not relaxing a limiting factor on economic growth.
> For all the same reasons you should worry about cows being expensive (even if milk is still cheap), you should worry about real estate being expensive (even if rents are low).
I would argue that the only reason you should consider cows being an expensive an issue if milk is cheap is in regard to it making some other bovine product expensive; cows aren’t important in and of themselves, but as instrumentalities in the production of milk and other products.
> In the case of a household, those mean that you can’t take some of your production, and save it for the future in capital goods
No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments.
> In the case of a central bank, those mean that the injections of money aren’t (currently) effective for stimulating economic activity
No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working.
What would indicate that it is not working is if output figures did not exceed what was expected without the policy.
>No, asset inflation absolutely does not mean that. Increasing the minimum buy in for asset investments would do that, but we’ve got mature enough financial markets that a general increase in asset prices doesn’t increase the minimum needed to enter productive investments.
Yes, "can't", taken literally (and uncharitably), is incorrect. I was exaggerating. The point is it becomes much more difficult with lower yields, just as it becomes so with cows. To produce the same X units of milk tomorrow, you have to save more milk now (to buy the cow) -- the same effect as if you had less to save due to your consumption goods being more expensive.
So, no, "mature financial markets" don't really solve this.
>No, it doesn’t; driving money into productive investments and out of cash (which, as an expected side effect, produces asset price inflation) is part of the mechanism by which loose monetary policy is expected to stimulate economic activity. Asset price inflation does not indicate that that is not working, it is what you expect if it is working.
Money going into productive investments is only good if it also translates into productive economic activity. You can't just say, "we gave it the old college try, so that's a win". We're seeing P/E ratios go up (earnings yields down), which means that the higher asset prices aren't translating into that productive use of assets. And even by your own standard, the flows into gold, bitcoin, and idle real estate indicate a failure.
>What would indicate that it is not working is if output figures did not exceed what was expected without the policy.
To the extent that purchase prices vary independently of rental prices in the same market, the CPI inclusion of equivalent rents will not reflect home purchase prices.
Then again, I don’t see why it should, unless it is some measure based on the lower of rents (actual or equivalent) or amortized purchase and ownership costs (as you need shelter one way or the other), but that could only drive the CPI down compared to just considering rents as is done now.
Yes we have the usual supply constraints, etc.