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 Feb 2009 the CS-CPI fell at a negative 5.0% YOY for essentially the third straight month (-4.9% for Dec 2008 & -5.1% for Jan 2009) as compared to a flat YOY reading (+0.2%) for the CPI-U. The Government OER (Owners Equivalent Rent) data continues to move higher (+2.1% YOY) while home prices continue to move lower (-19.5%) further amplifying the divergence between the two CPIs to once again its largest level ever. Additionally, the new 2009 OER “importance” (read weighting) rose by 210 basis points to nearly 1/4 of the CPI-U (24.433%). In fact, since 1987 the OER’s importance has increased from 19.1% to today’s present 24.4%. Now more than ever it’s important that housing costs be accurately tracked in order to have a realistic CPI, yet there is continued emphasis on the dated OER metric.

The CS-CPI and CPI-U will be interesting data points for the next 6+ months as last year’s Mar – Oct data points were much higher than today’s due largely to high energy prices last year. This will likely produce data points officially showing deflation within the CPI-U for the first time since 1950 and potentially showing -10% deflation for the CS-CPI.

What is equally amazing is that it was about 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.

See Case Shiller March 2009 Analysis for the Case-Shiller Housing data used to compute these charts.

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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