Naked Capitalism Link of the Day

Today's link: How Inflation Might Have Looked With Home Prices Counted, at the New York Times:

Until 1983, the Consumer Price Index included housing costs. But then the index was changed. No longer would home prices directly affect the index. Instead, the Bureau of Labor Statistics makes a calculation of “owners’ equivalent rent,” which is based on the trend of costs to rent a home, not to buy one. The current approach, the B.L.S. says, “measures the value of shelter to owner-occupants as the amount they forgo by not renting out their homes.” The C.P.I. is not supposed to include investments, and owning a house has aspects of both investment and consumption.
Whatever the reasonableness of that approach, the practical effect of the change was to keep the housing bubble from affecting reported inflation rates in the years leading up to the peak in home prices. It is at least possible that the Federal Reserve would have acted differently had the change never been made.
The accompanying charts represent an effort to put together an alternate index of inflation, one that includes home prices rather than the owner’s equivalent rate. The effort is far from precise, in large part because the old index was based not just on purchase prices but also on changing mortgage interest rates and on changing property taxes, while this one is based solely on an index of home prices. But it nonetheless gives an approximation of what inflation would have looked like had home prices remained in the index.
The effect is particularly notable in the core index, which excludes volatile energy and food prices, and which the Fed monitors closely. In 2004, when home prices were climbing at a rate of almost 10 percent a year — more than four times the increase in rents — the core index would have been over 5 percent had home prices been included. Instead, the reported core rate was just 2.2 percent.

This issue drove me nuts at that time.  I was complaining immensely about home prices increasing so much faster than wage growth.  The truth is that I think the Fed wanted housing prices to increase significantly to make up for the fact that wages were stagnant and the stock market bubble had collapsed.  They got it, for a while.