“Home prices are up a record 19.5% in the past year, according to Case-Shiller data, writes Joseph Carson, former chief economist at AllianceBernstein, in his blog. However, they were removed from the official price indexes owing to political and statistical issues. If they were still included, inflation would be running at a 10% clip, rivaling the 1980s, he adds.”Barron’s, October 25, 2021
Hmm … I thought my money wasn’t going as far this year … Did an awful lot of renovation and maintenance work on the house. Likely the high costs were related to overall housing inflation.
Teaser - Another provocative sounding article in this week’s issue (which I haven’t yet read): “
Parallels Between Now and the Roaring ‘20s”
Comments
https://music.youtube.com/watch?v=5aeWicwy7fA&list=RDAMVM5aeWicwy7fA
This is silly, or at best tendentious. Why should rare years-apart purchases be included in widely impacting run-of-the-mill inflation calcs? Go read the many articles posted here about what the 'official' rates comprise, and why.
“On the equity side, now I’m actually risking up,” said Elizabeth Burton, chief investment officer of Hawaii’s Employees’ Retirement System. “I don’t know how you make money, long term, without equities, anyway, but I don’t think now is the time to be taking less risk there.”
Yup - If I were running a retirement fund with a near limitless time horizon I’d feel the same way.
I do think there’s some credence to the low inflation / deflationary theory (technology plus demographics). But if that’s the case, than I’d say the run-up in a multitude of risk assets ought to burst sooner or later.
https://www.bls.gov/cpi/factsheets/new-vehicles.htm
The Economist: “House prices were included in America's CPI between 1953 and 1983 before being removed. This was partly because indexing benefits and pensions to inflation had become expensive and some politicians wanted to bring measured inflation down”
Source:
Thanks for your time, Derf
The basic formula for the total transaction price used in calculating the new vehicles price index is:
Base price of new vehicle + transportation to dealer + total price of packages & options + dealer prep and miscellaneous charges + additional dealer markup – dealer concession or discount - rebate +applicable non-sales tax = total transaction price
If we leave out the expensive stuff then everything looks just fine...
https://www.bls.gov/opub/mlr/1982/06/art2full.pdf
Government expenditures, though not mentioned in the paper, could have been part of the reason for the change. As stated in The Economist, that would be strictly a data driven decision, i.e. based simply on the fact that housing prices were rising rapidly.
The MLR piece notes that there had been a recent statutory change in how government revenue would be affected by inflation. That change called for a more accurate CPI calculation:
https://www.zdnet.com/article/hunker-down-the-chip-shortage-and-higher-prices-are-set-to-linger-for-a-while/
Yeah, except that nobody can get any.
That reminds me of a place that I once worked (wasting a good portion of my life):
Customer: How much is that part?
Clerk: (Quotes price)
Customer: That's outrageous! Your competitor is charging half of that!
Clerk: Well then, you should buy it from them.
Customer: They're out of stock on those right now.
Clerk: Well, if we didn't have any we could easily beat their price!
https://www.nytimes.com/2021/04/16/opinion/economy-inflation-retail-sales.amp.html
embedded inflation, which is the kind of inflation we really need to worry about, is inflation in prices that don’t change very often.
etc.
https://www.cnbc.com/amp/2021/10/05/yellen-sees-inflation-staying-higher-for-the-next-several-months.html
And from this morning:
https://www.cnn.com/videos/politics/2021/10/24/full-interview-with-secretary-janet-yellen.cnn
We’ll see.
One person told me he had been ask to cough up an extra 10 k on a new drive at a dealer , 5k at another place & finally coughed up an extra $750 for his new ride.
EXTORTION NOT ? , Derf
Until the past decade or so, average time of home ownership was about four years. For example:
Source page: https://ipropertymanagement.com/research/average-length-of-homeownership
New car ownership in 2017 was almost seven years, or just a shade less than home ownership since the GFC.
https://www.cnbc.com/2017/05/28/car-owners-are-holding-their-vehicles-for-longer-which-is-both-good-and-bad.html
Is this minuscule difference in holding periods really what you want to pin your continuum premise on?
I'm sure you're aware that when housing costs (including investment attributes) had been used in calculating the CPI, those costs included mortgage interest, property taxes, insurance, and maintenance expenses. That's in the paper I cited.
Paraphrasing your original question, why should frequent, periodic cash outflows (interest, taxes, insurance, and maintenance costs) be excluded from widely impacting run-of-the-mill inflation calcs? Even if those costs fluctuate wildly from month to month as construction (maintenance) costs have done this year.
You are the one w firm and presumably non-continuum answers for what should be ‘embedded’ and what embedded comprises or ought to, while all of the professional minds debate endlessly what prices changing ‘very often’ means or should mean.
What in a sentence is the ‘kind of inflation we really need to worry about’? What should ‘very often’ be defined as? I again encourage you to write the paper to inform the views of the other experts.
The "experts" disagree on this topic.
Here's a look at S&P 500 (and its predecessor) calendar year returns along with annual inflation.
Link
You posited (in)frequency of transactions as a rationale for excluding home prices from the CPI-U. Not from some sort of core CPI, not from some "embedded" inflation calculation, but from the CPI-U. I simply pointed out that if that were the rationale, then vehicle prices would also be excluded.
ISTM that given this exclusion rationale there are three alternatives:
- vehicle prices should not be included in the CPI-U. They are purchased at about the same frequency as homes and can be just as volatile: used vehicles up 24% Y/Y, homes up 19.5%.
- there is some other continuum (what?), aside periodicity or potential volatility, that distinguishes the housing component from the used vehicle component
- the periodicity rationale given is at best incomplete (kindly complete)
The bottom line is simple: CPI-U is a measure of inflation as seen by the "average" consumer. The average consumer sees wildly fluctuating prices, including gasoline (up 42% Y/Y) and medical supplies (down 1.6%). Welcome to the real world.Whether one should worry about this or how one should smooth out the volatility is a different question, and not the point of the Barron's piece.
>> removed from the official price indexes owing to political and statistical issues.
A lame, misleading (not only silly and tendentious meaning promotional) attribution, I say.
Meanwhile, did everyone listen to Yellen yesterday? (link above) May she be right. Will take a while.
Meanwhile 2, some booga-booga:
https://www.businessinsider.com/twitter-ceo-jack-dorsey-hyperinflation-us-economy-consumer-prices-2021-10
Accepting that explanation, then rather than reintegrate housing prices into the CPI-U as Carson did, we should remove vehicles from the CPI-U. Thus the 2021/2020 (Y/Y) CPI-U increase is actually significantly lower than reported.
That's not being contradictory. That's working with your thesis and exploring its implications. I didn't say whether vehicles should be excluded from the CPI-U. I did ask whether you agreed with where your thesis led - that vehicle price increases should not be counted in calculating the CPI-U.
Maybe, despite the statistics, your gut tells you that on some continuum car purchases resemble day-to-day expenses more closely than do home acquisitions which are "rare years-apart purchases." Perhaps looking at different inflation component will help clarify what you have in mind with this continuum.
College educations, rather than being rare year-apart, are often one time purchases. On average, people tend to attend college once in a lifetime. Many never attend college. Some may attend even multiple times without attaining a degree. Others may make multiple "purchases", i.e. earn multiple degrees.
Regardless of the precise average number of college education purchases per lifetime, the purchasing of college educations would seem to share many attributes with home purchases - infrequent, not a day-to-day type of expense, something one budgets for years in advance, something that is paid for over a period of years, something that is "consumed" over multiple years.
Help us understand whether the reason you gave for excluding home prices from the CPI-U also excludes the cost of college educations.
The government statistics on inflation are rubbish and have been since they started 'adjusting' them in the 80s. Too many COLAs and other ties to the CPI. feh. It's called screwing the public and hiding the facts about the dollar.
@Hank you mentioned that housing was eliminated in the early 1980s. Other things also. Here is Shadow Stats showing CPI like they calculated it in the 80s' and later the 90's. Ever hear of Hedonic adjustments? That's when a product is 'new and improved' they can charge more and the increase is no included. That's fine if you can still buy the old and unimproved item. Right.
Notice that he has the earlier version of inflation running about 12-13%
http://www.shadowstats.com/alternate_data/inflation-charts
They're still dealing with the Unfunded Liabilities overhang that we've talked about for years now. What some $100 T. Their choices were to break as many promises as politically possible and deflate the currency by about 50%. Please note that it's down 96% since '13 so it only has to go to 2%. Easy. And let's not talk about the strong US dollar. Er, it's the cleanest pair of dirty socks in the hamper.
and so it goes,
peace and wear the damn mask,
rono
CPI figures have been adjusted since day one (1919). In 1921 the government cobbled together a national figure from an unweighted average of 32 city figures.
https://www.bls.gov/cpi/additional-resources/historical-changes.htm
Would it be preferable to keep counting buggy whips, or whatever was in those 1919 averages rather than 'adjust' the inflation components over time?
Ever hear of Hedonic adjustments? That's when a product is 'new and improved' they can charge more and the increase is no included.
Sure, I've heard of hedonic quality adjustments. They can go up or down, based on the product change and the value of that change.
https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm
Certainly $300 buys more computer today (Best Buy's sub-$300 computers) than it did with the Commodore VIC-20 in 1981. Should we 'adjust' the CPI for this increase in value (i.e. recognize that computers are cheaper today)? Or do we stand firm and insist on making no adjustments based on product quality?
We could actually continue to include the Commodore and its ilk in the CPI. It looks like they're still available at around 2/3 the original selling price.
Can't; just a sense. But I had not delved the OER paper below.
If I had a really good answer about education costs and how to think of them, I would be a policy expert in this long-studied and -argued area of what inflation figures should comprise. Or a BLS grunt. It's not that BLS is not thorough:
https://www.bls.gov/cpi/factsheets/college-tuition.htm.
But some sort of equivalent for tuition / edu expenses to OER, owners' equivalent rent for primary residence would be cool. Different weightings?
https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.pdf
Your penultimate 'consumed' paragraph may be a start to thinking somehow about properly amortizing (not your wording) education costs and benefits and economic effects.
The notional reason is to come up with a range of inflation rates that feels more representative to more people, if that's a feasible goal. Perhaps not feasible; as the Week wrote, obviously, almost 7y ago,
So for the person or firm spending a lot of money on computing equipment, prices are currently falling. The opposite is true for those spending a lot on tuition fees. And that's barely scratching the surface — have a look at all the different sectors, and you'll see that different people can all experience radically different rates of inflation depending on what they buy, even while inflation as a whole is low and stable.
But in that essay --- its hed was 'Why won't inflation conspiracy theories just die already' --- they don't bother to mention the inclusion or the exclusion of food and energy from core.
As for Forsyth, he has been beating his particular housing drum for a long time. (Last February: https://mylocalhomeappraiser.com/home-value/home-price-surge-says-inflation-is-real-the-fed-clings-to-illusion-it-isnt-barrons/.) Do you yourself think his take is more representative than Powell's?
My head is full of loosely connected thoughts that would take too long to organize coherently now, so I'll just toss out a few for the moment.
I like BLS's idea of separating out expenses from investments. Just as we don't include stock prices in inflation, OER is designed to exclude the cost of a home as an appreciating asset. At the same time, it attempts to count the costs (including operating costs) of the shelter aspect of one's home. While we can debate how well it accomplishes this, it is a reasonable approach.
Side note: my property taxes are based not on the selling price of comps, but on the theoretical value of my home as rental property. Take market rental rates, and use current interest rates to work backward to compute the "correct" assessment, regardless of what my home would currently fetch. This has got its own set of problems, but serves to show that using OER is not limited to CPI calculations.
Side note: the fact that homes can be viewed as a potentially appreciating asset is something that differentiates homes from vehicles. Except for antique vehicles, which BLS explicitly excludes from the CPI. They're viewed as pure investments, not transportation.
Similar to homes, education has attributes of daily expenses and attributes of an investment. (Perhaps I've been listening too much to Build Back Better's expression of education as an investment in human "capital.") Thinking about this it seems that the two categories of expenses could be treated similarly.
Amortizing the expenses over several years, as a homeowner does with monthly PITI payments could be a reasonable way to incorporate home prices directly and smooth some of the price volatility. Just as students wind up carrying college debt for many years.
Not only do different people experience inflation differently, but inflation on the national level can be different from the way individuals experience inflation. For example, last year the cost (premium) of Medicare insurance went up $3.90, but it should have gone up roughly four times that to cover projected expenses.
From a national perspective medical costs rose by some given amount; it didn't matter who was paying the increase. However, as a result of the subsidy, individuals experienced a lower rate of inflation in 2021. Of course now that this subsidy has expired, Medicare recipients feel like there's a higher rate of inflation. This, despite medical costs having stabilized from a national perspective.
Regarding Forsyth, I haven't really read him. But I did read the cited Carson blog that has much of the same flavor. I tend to tune out things like that because people are good at complaining about perceived wrongs, but tend to be silent when the same measures work out in their favor.
For example, the Senior Citizens League is very good at banging the drum for using CPI-E as opposed to CPI-W for COLAs. But we haven't heard a peep from them this year, not since CPI-W came out a percent higher than CPI-E. What will Fosyth say the next time housing prices fall?
I have trouble ripping off Barron's, but last spring Forsyth seemed not a fan of rent equivalencies, although I find him hard to follow in general sometimes and pin down (probably my bad); from 6mos ago:
https://www.barrons.com/articles/why-inflation-is-running-hotter-than-it-looks-51620855700
and he does get to tap his drum by invoking Carlson.
(One commenter says Barron's is a liberal cover or something. Maybe I should pay up.)
We have not even mentioned / argued about regional CPIs. I know the 'experience' qualification is important; Old Joe would concur. I sense that elders Yellen and Powell are savvy about that, but obvs they have to deal in the world of macro policy.
You yourself have got to do a blog or draft paper on education and inflation calc.
I am fascinated at your PT calc report. You probably even know what cadastral means:
https://en.wikipedia.org/wiki/Property_tax