For most people, housing is a major expense, and often the single largest one.
For most people, housing is a major expense, and often the single largest one. Hence it is rightly a big part of the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE).
The Federal Reserve favors the PCE measure, while for whatever reason, the business media seems to focus on CPI. Typically, the core CPI and PCE move more or less in tandem. But notice that both measures use housing as their biggest component.
Notice that owner’s equivalent rent (OER) in the CPI is 23.4%, but total housing costs are weighted at 42.4%.
Housing prices have no direct influence on our inflation measures. They do have indirect influence via the imputed, subjective “owner’s equivalent rent” methodology. Its accuracy is questionable at best.
What’s not questionable, though, is that home prices have a direct impact on the homeowner’s spending power.
If Greenspan had raised rates because of rising inflation starting about 2003–4, there would have been no housing bubble, no subprime crisis, no overheated stock market, and no stock market crash.
We would not have had the worst unemployment numbers since the Great Depression.
Retirees and everyone else would have been able to earn reasonable yields on fixed income instruments.
John Mauldin 12 March 2021
https://www.mauldineconomics.com/frontlinethoughts/inflation-is-broken
Consumer Price Index (CPI)
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