Wednesday, November 16, 2005

"Equivalent Rent" Distortion Finally Noticed In Media

Finally, a mayor news outlet noticed the way in which the government calculates "home owner's equivalent rent" underestimates inflation.

From CBS Marketwatch:

"Housing prices - and the core CPI -- would have risen even more, except for a statistical fluke stemming from the way the government calculates homeownership costs by using rents of comparable houses.

Because many houses are rented with utilities included, the rental portion of the monthly bill is deemed to fall when utility prices rise."

It should be added that overall CPI is underestimated too because of this factor, although slightly less so than core CPI.

I made the same point months ago in my essay on "core inflation":

"This effect is enhanced in the statistical numbers by the fact that when fuel prices rise while rents have in the short-term not been adjusted upwards then the "home owners equivalent rent" will be decreased as it is calculated based on rents minus fuel costs. Meaning that any increase in fuel costs for home owners will be exactly matched by an equivalent decrease in "home owners equivalent rent" which in turn means that higher energy prices will at least in the short term have the effect of lowering the core inflation numbers."


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