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."Owners' Equivalent Rent" (OER) is the largest component in the government measure of the Consumer Price Index (CPI).
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.
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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