Comments on: Does the Government Understate Inflation? — Bill Gross Says Yes

By: Consumer Prices Tumble | Mutual Funds Experts

Consumer Prices Tumble | Mutual Funds Experts — Sun, 21 Dec 2008 20:53:07 +0000

[…] Part Two: Does the Government Understate Inflation? — Bill Gross Says Yes […]

By: Consumer Prices Tumble | Mutual Funds Discussion

Consumer Prices Tumble | Mutual Funds Discussion — Sun, 21 Dec 2008 20:44:09 +0000

[…] Part Two: Does the Government Understate Inflation? — Bill Gross Says Yes […]

By: Matt

Matt — Wed, 08 Oct 2008 17:04:38 +0000

Both Owner Equivalent Rent and the Case-Schiller index are flawed measures of housing inflation. Neither actually measure how much families are paying for housing.

The Case-Schiller index tells you how much a family pays for new housing, but very few houses are new. Most families are making payments on houses that they purchased in prior months or years. As such, the Case-Schiller index over marks for current housing price changes.

Owner Equivalent Rent isn’t any better. It is a more stable measure, but it doesn’t include any information on the cost of buying a house. Essentially what it does is increase the weight for rental price changes.

What the CPI really needs is an index that tracks actual housing payments made. Such an index would have been increasing during the housing bubble but would not be falling as sharply as the Case-Schiller index now. It would reflect the reality that two houses with identical assessments might have widely different costs, because the mortgage snapshots a house’s value at a particular point in time.

Such a housing payments index would have measured inflation higher for the last five years (and presumably led to a tighter monetary policy). It might show inflation slightly lower now, but not by too much until a number of mortgages have a chance to be financed for the new house prices.

By: ssm

ssm — Sat, 21 Jun 2008 19:49:36 +0000

Here’s a riddle for ya: A certain farmer needs a trench dug and employs a bunch of men with shovels to dig it. He pencils in a ledger that it took 365 man-days to dig the ditch. A number of years later he again needs a similar ditch dug. Progress during this time has invented the mechanical shovel (backhoe) and the farmer employs a man with his backhoe to dig the ditch. It takes this man one day to dig the ditch and the billed cost is the equivalent of 50 man-days when compared to the first digging. 20 of these man-days went to the operator, and 30 man-days represented the cost of providing the backhoe.

What effect would this capitalization of ditch digging have on the CPI?

By: Chris

Chris — Thu, 19 Jun 2008 17:36:03 +0000

What is the goal of a CPI number? Once that is agreed upon, it becomes easier to make choices about baskets of goods and quality improvements. If the goal of a CPI number is to give politicians some insight into the present quality of life of their constituents (so as to avoid the bread to cake substitution problem that historically leads to decapitation) then equivalent rent, substitution, and quality improvements make a certain amount of sense. If, on the other hand, the goal is to provide decision makers with good data to plug into their models so as to predict the future (ostensibly what they are trying to do with their soft landings and whatnot) I’m not so sure.