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No Inflation Myth Debunked

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11/17/2003

CNN has picked up on something that few in the mainstream press have noticed: the self-reinforcing character of the housing bubble. The consumer price index, which purports to measure price increases in the cost of living, does not incorporate housing prices, which have been climbing steadily over the last three years. Instead, the CPI uses "owner-equivalent rent", which is the amount of rent that a home owner would pay themself if they rented their own home to themself.  Because of the liquidity being funnelled into the housing money by Fannie and Freddie, demand for housing has been shifting from rental to ownership, thus weakening the rental market.   With home prices rising rapidly, the housing compont of the CPI contributes to measured inflation remaining low. As long as the bond market believes that there is no inflation, long-term interest rates remain low, which feeds the housing buble.  Read  more.

Jim Puplava's excellent commentary  Good and Bad Inflation, provides a economic analysis of how inflation expectations influence the supply and demand for money, and how the effects of increased money supply can show up very unevenly, some times affecting consumer prices but other times flowing into financial asset markets.

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