Angus at Kids Prefer Cheese is shocked at the disconnect between housing prices and CPI
Chairman Ben’s point of view is that the Fed should do so only to the extent that the bubble bleeds into overall inflation.
Here’s a graph, courtesy of Dr. Housing Bubble (clic the pic for a more glorious image):
The red line shows the growth rate in the Case-Shiller housing price index, the blue line shows the growth rate of housing component of the CPI.
From 1998 to 2006, there was a complete disconnect between housing prices (rising like crazy) and the BLS measure of owner equivalent rent (which never went up more that 4% in any of those years).
Hard for a bubble to bleed into inflation when it’s been defined out of the index!
Stock and bond prices aren’t in the CPI. In theory, however, exploding stock and bond prices could lead to increased spending and to inflationary pressures.
We can argue that one should target asset bubbles, but not having housing prices in the CPI is appropriate. If all people cared about was finding a cheap place to live then they could rent. People buying homes in the bubble were making bets on housing prices, interest rates and/or future rents.