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Thursday, May 08, 2008

Tim Duy: Misunderstanding the CPI

by Calculated Risk on 5/08/2008 10:53:00 AM

Professor Tim Duy writes at Economist's View: Misunderstanding the CPI. This is an excellent discussion of CPI, and review of David Loenhardt's article yesterday in the NY Times: Seeing Inflation Only in the Prices That Go Up.

Also, here is a great graphic showing the relative size of all of the components of CPI: All of Inflation’s Little Parts (hat tip Eyal). Notice the size of "owner's equivalent rent" (OER).

Dr. Duy discusses OER and then concludes:

[T]he debate over the use of OER in the CPI is something of a false debate. In my opinion, it misses the point entirely. The debate is not whether housing costs are miscalculated in the CPI – the BLS’s basic methodology is appropriate to achieve their objective. The debate is whether or not the Fed should include assets prices, such as home prices, in their policy objective of price stability. Just because there is a valid argument that the Fed should be using a measure other than (or in addition to) consumer prices does not imply that the CPI is flawed. It implies that the construction of monetary policy is flawed. In effect, the BLS is unfairly criticized for the Fed’s policy error.