Here’s Proof That Core CPI Is Really +3%, Not +1.8%

The BLS reported today that Owners Equivalent Rent, a fictitious input to the CPI which, with the similarly formulated lesser item rent of primary residence accounts for nearly 32% of the total weight in the index, rose by 3% between July 2014 and July 2015, including a seasonally adjusted, fictitious +0.3% month to month in June.

The BLS has used these tortured calculations since 1982 to suppress the housing component of CPI. Prior to 1982 the BLS had included house prices, but because the actual purpose of CPI is for indexing government benefits, including housing inflation at its actual rate became too costly. The BLS therefore eliminated it from consideration in the second year of the Reagan administration.

Since then, they have used the fictitious construct of Owner’s Equivalent Rent. From time to time the BLS asks owners what they think their house should rent for. They adjust that fantasy number every month by the actual amount of rent that tenants pay according to surveys of tenants. In the business, this is known as contract rent. The problem with that is that leases are typically indexed to CPI, or capped at 2-3% per year increases. Tenants who have been in their apartments for years see their rents going up 2-3% and that’s what they report. So this component of CPI magically looks like CPI most of the time, except when the gap because so large that landlords begin to push harder for bigger increases in long term leases. This lag factor eventually causes OER to play catch up to reality, but it never catches up completely. Since 2000, OER has risen at a compound annual growth rate of +2.5%.

Meanwhile, market rent, which is the actual price paid by tenants in the marketplace, and is the true state of price level inflation, has been rising much faster. Over the past 15 years rents have risen at a compound annual growth rate of +3.7%.

 

Market Rent vs. OER Long Term

However, the actual price of rent in the market is not considered. And the actual rate of house price inflation is not considered. If our aim is to measure inflation, shouldn’t we be measuring actual prices in the market place, rather than people’s imaginary opinions, and fixed rates of increase established by contracts written years ago? What does a lease signed in 2008 have to do with current conditions? Using OER instead of market rent or actual house prices, to measure “inflation” is fraud, plain and simple.