Courtesy of Mish.
With housing prices still rising, albeit more slowly, inquiring minds might be wondering about “Real” interest rates and the “Real” CPI?
CPI Distortions
I believe the CPI is hugely distorted, but not for the same reasons as everyone else. Home prices used to be in the CPI but the BLS now uses OER (Owners’ Equivalent Rent). OER is a measure of actual rental prices as well as fiction.
The BLS determines OER from a measure of rental prices and also by asking the question “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
If you find that preposterous, You are not the only one. Regardless, rental prices are simply not a valid measure of home prices.
OER Weighting in CPI
OER has the single largest weight of any component in the CPI, at 23.957%.
Let’s play “What If?” Specifically, “What if the BLS used actual home prices instead of OER in calculating the CPI?”
HPI-CPI
Periodically, Black Knight Financial Services provides the actual data behind their HPI (Home Price Index), a measure of actual prices.
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