The Golden Jackass, a market research company, in its column Backfire on Corrupted Price Index [Goldseek] discusses why the (tongue-in-cheek) column calls the Consumer Price Index, the Corrupted Price Index. The way the housing market is handled within the CPI calculation is to blame. We discussed this in a prior post.
Buy the property, bid its price up, while the rental properties go begging with minimal attention. Now rising rents are the new phenomenon, as the housing boom deflates. House properties are fast becoming unaffordable. People flock to rental homes and apartments, thereby pushing up rents requested and paid.
The down side of the corrupted CPI game has begun to show itself in the latest month. Not only have housing prices softened, but the balance of rent versus housing price now damages the CPI as reported. A jump in the rental component was enough to lift the April CPI by 0.6%, translated into 7.2% annualized. The shelter cost accounted for half of the increase in the core CPI increase. The financial markets remain transfixed on the core, in defiance of the harsh reality for the communities and corporations which must eat food and consume energy.
Is current inflation overstated? If housing prices are flat as best case and rents are rising, the current methodology is to use the rental equivalent of sales activity as part of core inflation. Since housing is something like half of the core inflation result, CPI will be overstated. Of course during the housing boom, just the opposite was true. Inflation would have been significantly understated.
It makes you wonder what use CPI has in the real world.