The following chart shows the effect if one substitutes the Case-Shiller housing index for Owners’ Equivalent Rent in the CPI.
Case-Shiller-CPI (CS-CPI) vs. CPI-U
click on chart for sharper image.
The above chart is courtesy of my friend “TC” who writes:
For Dec 2008 the CS-CPI fell to a stunning negative 5.0% year-over-year as compared to a positive 0.1% for the CPI-U. Moreover, the Government OER data continues to move higher while home prices continue to move lower amplifying the divergence between the two CPIs to its largest level ever. The CS-CPI now reflects a price level last seen in Dec 2006.
What is equally amazing is that it was less than 2 1/2 years ago (Sep 2005) when the CS-CPI was positive 7.8% year-over-year and we’re now 1280 basis points lower. Deflation is here and it’s now even beginning to show in the government’s CPI-U data.
“Owners’ Equivalent Rent” (OER) is the largest component in the government measure of the Consumer Price Index (CPI).
OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. OER is not a valid pricing barometer.
By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.
Data for the above chart is from two sources.
- Case Shiller January 2009 Release
- December 2008 CPI report. See CPI at .1% Annually, Smallest Increase Since 1954 for details.
For more on the methodology behind this post please see the discussion following CS-CPI Negative 3.1% Year over Year in November.
Real interest are very high even at zero percent!
Mike “Mish” Shedlock
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