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Is inflation understated? Show more Show less
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The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time. This index is often used as a benchmark for inflation. However, the inflation levels the Consumer Price Index suggests are not without controversy. Often inflation is accused of being overstated or understated. So what is the truth? And why would it be either?

Yes, inflation is understated Show more Show less

The government has a vested interest in inflation being understated, and the data it is based on it largely theoretical.
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Inflation indices do not reflect reality

Much of the inflation basket is theoretical and not based on increases in price.
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The Argument

Since 1983, the government has measured the price of homes not by looking at house prices but by computing what it calls Owner's Equivalent Rent (OER); the rental value of a house. It accounts for nearly a quarter of the entire Consumer Price Index. When the change was made, the inflation rate diverged sharply from changes in house prices.[1] The OER was fairly subdued while house prices surged before the housing bust, and afterwards the reverse happened.[2] If the Federal Reserve had focused on house prices, it would have tightened monetary policy to deal with house price inflation. Instead it relied on OER, which understated inflation. The mechanisms the government uses to estimate inflation are not reflective of the reality of prices.

Counter arguments

Premises

[P1] The mechanisms used to estimate inflation cause it to be understated by not being properly pinned to actual prices.

Rejecting the premises

References

  1. https://www.nytimes.com/2006/06/09/business/09norris.html
  2. https://blog.principal.com/2017/07/06/owner-equivalent-rent-unmasked/
This page was last edited on Wednesday, 2 Sep 2020 at 07:28 UTC

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