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So Now It's Core Core Inflation?

June 14, 2006

Tags Capital and Interest Theory

For the third month in the row, "core" consumer prices, which the Fed and accordingly also financial markets have decided to focus on ( for irrational reasons ) showed a 0.3% increase, which translates into an annual rate of more than 3.5%, well above the official comfort zone.

The driving factor behind this recent pick-up in "core" inflation is the fact that rents have started to increase at a much faster rate (largely because the combination of higher house prices and higher interest rates have made home ownership increasingly unaffordable), and as rent and "owners' equivalent rent" (which is based on rents) make up 29% of the CPI or 38% of "core" CPI, this have a great effect on these numbers.

With even "core" inflation numbers showing high inflation, what are inflation-deniers supposed to do? Well, they simply come up with one might call core core inflation, that is, core inflation excluding rent and "owners' equivalent rent", with for example Ian Shepherdson, U.S. Economist for High Frequency, reassuring us that by excluding the numbers are still moderate. That would of course leave us with a "true" CPI consisting of just 48% of all items. If I didn't know better, I would be tempted to assume that they're attempting to do self-satire.

Yet, while they are right to imply that "owners' equivalent rent" distort cost increases for home owners, the distortion is still to underestimate, not overestimate (This may change if the housing market goes into a dramatic fall, but again, it have not yet happened). While "owners' equivalent rent" have risen 3.3% the latest year, house prices have risen 12.5%.

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