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Included below is an excerpt from Gene Epstein's column in this week's
Barron's discussing the under-weighting of housing cost increases in the
CPI: http://interactive.wsj.com/articles/SB953336874799500768.htm
(subscription required).
"And in the rental market, the Census Bureau reports that the nationwide
vacancy rate peaked in mid-1998 and then declined by fourth quarter '99.
Hardly consistent with a slowing in the rise in rental prices over this
period.
(Or try to get a contractor to redo your kitchen for a price that isn't
out of sight. In fact, the CPI does not directly track the cost of home
improvements, an omission that is especially glaring right now.
Indirectly, those costs are supposed to creep into the OER, but they do
so only glacially.)
Clearly, something has been amiss with the sample of dwellings the BLS
has been surveying. If you assume instead that residential rents and
owner's equivalent rent have accelerated over the past year, then the
2.0% increase in our core CPI approaches 2.5%. Over recent months, those
housing components have begun to accelerate, and if the trend continues,
it might even erase the mistakes of the past. (Those things tend to
happen with government data.)
How high is our core CPI likely to go? Mindful of the price pressures
that have been building on the wholesale level, Jason Benderly of the
Vail, Colorado-based Benderly Economics foresees it topping 3% by the
end of this year. And if all goes according to plan, then it should
converge with the headline CPI."
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