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How the Government Deceives us on Inflation, as Rents and Housing Costs Soar
Wolf Richter www.wolfstreet.com www.amazon.com/author/wolfrichter
It’s hard these days to worry about inflation amidst a maelstrom of voices claiming that there isn’t enough inflation to begin with, and that the world will end if prices stop rising even for a moment. Whatever inflation we may encounter in daily life, whether for healthcare, tuition, beef, gas, or cars, we’re told not to worry about it because the higher prices are either annulled by an elegant scheme called hedonic regression, or they’re only temporary, or the amounts are too small to impact the overall budget.
But when it comes to housing, which now accounts for 33.6% of what Americans spend [What’s Draining American Wallets? Interactive Chart], none of these excuses fly. Because inflation in housing has been red-hot.
Actually, it hasn’t been red-hot, the way the Bureau of Labor Statistics measures it. Its Consumer Price Index contains two housing components: “Owners’ equivalent rent of primary residence” (OER) and “Rent of primary residence” (Rent). They purport to measure the cost of “shelter,” which is the “consumption item” that a home provides and is thus included in the CPI. The cost of the home itself and any improvements to the home are considered an “investment,” not consumption, and therefore not part of the CPI.
Owners’ equivalent rent accounts for 23.83% of the CPI and rent for 5.93%, for a combined weight in the CPI of about 30%. It is by far the largest and most important component.
Inflation in these two categories was contained, as they say at the Fed. In July, owners’ equivalent rent rose 2.7% and rent rose a minuscule 1.0%.
And in reality?
Home prices rose 8.2% over the 12 months through June 2014 and 12% for the prior 12-month period, according to the Case Shiller 20-City Index. A far cry from the government-sanctioned owners’ equivalent increase of 2.7%.
And rents? They rose on average 6.3% in August from a year earlier, according to Trulia, with double-digit gains in five of the 25 largest rental markets: in Sacramento, rents soared 14.9%. In San Francisco, where the median rent for a 2-bedroom apartment is now $3,500, they jumped 14.5%. That $3,000 apartment a year ago would now cost an additional $435 a month, or an additional $5,220 a year! No inflation, no problem. In Oakland, rents jumped 14.4%; in Denver, 13.1%; in Miami 11.3%. In the 25 largest rental markets, rents soared on average 10%.
How can our trusty government be so far off the mark?
The data are obtained by survey. For “owners’ equivalent rent,” owners are asked what they think they would have to pay if they were renting the home. Hence a measure of implicit rent. For the “rent” component, renters are asked what they’re currently paying in rent. Even if they’ve lived in a rent-controlled apartment for 20 years and pay a ludicrously low rent, it becomes part of the statistics, and not the rent that a new renter would have to pay.
Surveys are easy to manipulate, in numerous subtle ways, and that’s why they’re used to determine shelter costs. The BLS could instead use market rents, which is a common measure of actual rents negotiated between renters and landlords at the signing of the lease. Each time a new lease is signed, it impacts market rent. But that would, like Trulia’s measure, indicate just how fast rents are rising. So, no way.
How large is the deceit? Over time, it adds up. From 2011 to 2014, market rent rose by 12.1% while owners’ equivalent rent inched up only 4.7%. OER understated actual rent inflation that people felt in their bank accounts by 61% in a little over three years.
Housing accounts for 30% of CPI, and understating inflation in housing will cut overall CPI by a big chunk. Actual inflation in housing costs is still there, but you can’t see it in the official numbers, on the government principle that hidden inflation is the best inflation.
It eats up your bank deposits and your wages and the value of your Treasuries and everything else you own. It pushes you into higher tax brackets though tax brackets are indexed to CPI – the hidden bracket creep.
Any government or corporate programs, pensions, and benefits that are indexed to CPI will gradually become less costly to the government or the corporation, and less valuable to you. The savings to them over time are huge. And best of all, understating inflation overstates “real” economic growth as measured by inflation-adjusted GDP. It’s the perfect solution for economies that are mired down.
Consumers, workers, and taxpayers are getting shafted without knowing about it. And the Fed doesn’t use CPI as inflation gauge for its purposes. It uses PCE, which understates inflation even more (chart). And so it can carry on its scorched-earth monetary policy while loudly proclaiming that inflation is below “target.” Hidden inflation is simply perfect.
Nevertheless, the Fed has embarked on a rate-hike cacophony. But ebullient markets are in no mood to listen and are pricing in “a later liftoff date” for the federal funds rate and a slower pace of tightening than FOMC participants themselves, the Fed finds. And it frets that the disconnect could cause financial instability. Read… To Avert Sudden Market Collapse, the Fed Tries to Spook Utterly Unspookable Markets
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Watching the S & P $GSCI -------the commodities/futures index---- tells a little story all its own, in that while it has descended, the companies who buy those raw material items in the index, have not passed those savings in their costs on to the rest of the economy. It seems to track more closely the actions of the FED.
From the FED standpoint, it looks like that is at least one component that they are using to decide when, if ever, to raise rates, not the consumer's' inflation, stagflation, and deflation that they experience in their daily living expenses.
http://www2.barchart.com/chart.php?sym=GDY00&t=BAR&size=M&v=0&g=1&p=WN&d... http://www.goldmansachs.com/what-we-do/securities/products-and-business-... http://en.wikipedia.org/wiki/S%26P_GSCIInteresting, that, from your link:
“Goldman Sachs' entry into the commodities market via the Goldman Sachs Commodity Index has been implicated by some in the 2007–2008 world food price crisis. In a 2010 article in Harper's magazine, Frederick Kaufman magazine accused Goldman Sachs of profiting while many people went hungry or even starved. He argued that Goldman's large purchases of long-options on wheat futures created a demand shock in the wheat market, which disturbed the normal relationship between Supply and Demand and price levels. He argues that the result was a 'contango' wheat market on the Chicago Mercantile Exchange, which caused prices of wheat to rise much higher than normal, defeating the purpose of the exchanges (price stabilization) in the first place.[1][2]”
Reminds me of this from Thomas Alan Orr:
Soybeans
The October air was warm and musky, blowing
Over brown fields, heavy with the fragrance
Of freshly combined beans, the breath of harvest.
He was pulling a truckload onto the scales
At the elevator near the rail siding north of town.
When a big Cadillac drove up. A man stepped out,
Wearing a three-piece suit and a gold pinky ring.
The man said he had just invested a hundred grand
In soybeans and wanted to see what they looked like.
The farmer stared at the man and was quiet, reaching
For the tobacco in the rear pocket of his jeans,
Where he wore his only ring, a threadbare circle rubbed
By working cans of dip and long hours on the backside
Of a hundred acre run. He scooped up a handful
Of small white beans, the pearls of the prairie, saying:
Soybeans look like a foot of water on the field in April
When you're ready to plant and can't get in;
Like three kids at the kitchen table
Eating macaroni and cheese five nights in a row;
Or like a broken part on the combine when
Your credit with the implement dealer is nearly tapped.
Soybeans look like prayers bouncing off the ceiling
When prices on the Chicago grain market start to drop;
Or like your old man's tears when you tell him
How much the land might bring for subdivisions.
Soybeans look like the first good night of sleep in weeks.
When you unload at the elevator and the kids get Christmas.
He spat a little juice on the tire of the Cadillac,
Laughing despite himself and saying to the man:
Now maybe you can tell me what a hundred grand looks like.
I hear Camp FEMA "Gated-Community" units are still reasonably priced.
Apply now, though - if you're not already on the "priority" Red List - to avoid the rush.
The real estate correction this time is going to be devastating ...what a Bubble!
**** OFF TOPIC ****
I know this is off topic, but I felt you all need to be aware of this:
The CBC is warning Canadians about a U.S. program where America law enforcement officers — from federal agents to state troopers right down to sheriffs in one-street backwaters — are operating a vast, co-ordinated scheme to grab as much of the public's cash as they can through seizure laws.
http://beta.slashdot.org/story/207105
Protect yourselves and respond accordingly...
The Public: "What's Cash"????
"Welcome to America, Canada's version of Mexico."
We got the freakin memo already!
These threads are not interconnected and many ZH readers appreciate these kinds of heads ups. Get a life...
As long as the Obamanoids can still get their Cheezies and Keystone, government will keep up the psyop that everything is the same or better than it ever was.
I have come to the conclusion that while inflation appears tame and government claims it is low it is growing. The seeds have been planted, and the number of them is somewhat shocking. Inflation lurks beneath the surface and is hidden away in the dark corners of our future.
Want to know where the real cost of things is going, just look at the replacement cost from recent storms and natural disasters. More on this subject in the article below.
http://brucewilds.blogspot.com/2013/06/inflation-lurks-beneath-and-hidde...
You're looking at a, "chair" and the FED is looking at a, "table".
to me it makes sense.
low inflation = low interest rates = low debt repayment = current interest rate is roughly about 2.6%, debt is 17.7 trillion dollars(US debt)
higher inflation = higher interest rates = higher debt repayment.
US receives about 2.6 trillion dollars in revenue.pays about 500 billion dollars in interest rates on the debt per year.if interest rates go up so does the debt repayment
so lets fudge the statistics and keep the repayments to a minimum
And, so, promises to pay have become money. In reality, the stablity of the value of money has been abandoned by those manipulating the reserve currency of the world - the essential property of an exchange-medium.
In the end, Zimbabwe ended its hyperinflation by abandoning its local currency.
Zimbabwe hyperinflation, estimated by the IMF, "peaked at 500 billion percent in 2008, came to a halt when authorities dropped the Zimbabwean dollar, ending the central bank’s ability to print money to pay the government’s debt. Zimbabwe now uses a multi-currency system that includes the U.S. dollar and South African rand."
Who gonna halt Janet's printin' of trillions of FRNs out of nuttin'?
Rents are WAY UPPPPPPPPPPPP
On the north fork of Long Island rents are way up only because there are so many Latinos who can put their brother , cousin and friends in an apartment. That's the only reason
If they pay their rent on time, with no hassle could you send them to Pittsburgh? I have a house for rent and they can put up to ten people in it for all I care. But they have to be tidy, neat and respect the property.
C.P.I. = Convoluted Price Index.
They can't afford to tell us the truth!
Time to stop using a different metric than the FED uses. They are not using the CPI.
At least then we know we the people have no expectations about what the FED is using to monitor its own effects on the broad economy. They are using Goldman Sucks numbers.
http://en.wikipedia.org/wiki/S%26P_GSCI
Is the gov really deceiving people on inflation? No. But still nobody is doing anything. That's what sheep do, let themselves be slaughtered.
dont confuse invasion with inflation, invasion is the cause of rent increases not inflation, wages are actually dropping (anti inflation) but density is increasing costs-that's invasion not inflation.
We can fix this with immigration enforcement as well as rent revenue taxes, but we wont because Max Stark sets public policy, not Americans. http://nypost.com/2014/01/05/slain-slumlord-found-in-trash-had-enemies-l...
Wolf just made the case.
Here’s the skinny. The Fed is destroying the economy and along with it the U.S. dollar as the world’s reserve currency.
At the center of the Fed is probably one or two men who exercise ownership control because you can’t have all the shareholder banking families making regular decisions. Therefore, it boils down to a kind of acting CEO.
And the way Goldman Sachs operates, it is probably Goldman Sachs, controller of the NY Fed.
What’s happening is a centralization of control of the world; the world is down to a shadow power of three or four men making the decisions. It means they are going to be easier to break.
When you get down to the Federal Reserve controlling BIS and central banks around the world and the Federal Reserve Bank of New York, it boils down to who is the major stockholder of the NY Fed, which family has the controlling shares enabling it to dictate officers, the U.S. Secretary of the Treasury and most of the top financial positions in the U.S. government and central banks of the world.
You can see by the way things are going, IMO, that they don’t have the long-term expertise of a J. Pierpont Morgan. They are not handling their positions well. If Pierpont were here, IMO, he would be developing a long-term economy that could prosper for the next generations, not destroying it.
You can see by the evidence of Fed policies that they are destroying the politics that supports the Eurozone – driving it into the ground. And they are damaging the central paymaster which is the American middle class that developed this economic miracle which these European bankers rushed over here to grab.
When you manipulate a country such as America to the point that a Barack Obama becomes president, it means the people making these decisions are destroying the potential of their Empire. And perhaps the dumbest decision they’ve ever made was to share and work with Israel. That’s just poor business. I can’t emphasize this enough; it is poor business; it is bad for their marketing position.
If things continue as they are, Nigel Farage is going to be the Prime Minister of England; governments are going to be overturned in Europe. We are going to see the death of the euro
You can’t fight wars and make money and support the economy at the same time. You can’t destroy entrepreneurialism and America's middle class and build a pathway to the stars with paper.
"If Pierpont were here, IMO, he would be developing a long-term economy that could prosper for the next generations, not destroying it."
Maybe not, if JP were alive now. He died in 1913, in the apex of his career the USA was maturing in its industrial revolution. The Pennsylvania oil boom had just ended, and oil production was moving to Texas. The USA was an oil exporter. The radio had just been invented, the telegraph in wide use since the 1840's. The trans continental railroad was completed in 1869. Commercial merchant steamships had been used since the 1870's. The dollar was backed by gold. The usa was an agricultural nation, and the DJIA was at 68. It was a much different world.
Maybe it makes sense for the masters of the world to strip the USA economy clean now, while its still worth something. Maybe signals on wires and the internal combustion engine are played out.
Thanks for the history lesson. I've enjoyed it immensely. But you have forgotten the single most important economic event of 1913 --- the beginning of the Federal Reserve. And if Morgan were alive he would have instructed the young wild-eyed bankers in how you kill the goose or you make the goose lay golden eggs. Jack not-so-smart Morgan reaped the heritage of JP Morgan's management of politics and economics. Today's crop of TBTFs are going to fail spectacularly because of their impatience and greed. JP's and the older Rothschilds' idea was to exercise control and manage resources for a continuous payday for themselves and their succeeding generations of Rothschilds and Morgans, not to drive the goose into oblivion.
The economic engine that JP Morgan road in on soon will be grinding to a halt. Janet is blowing up the future...for Janet.
It's hard to imagine that Nathan Rothschild's goal would have been to destroy the British Empire and see himself and the King hanged. He wanted this thing to roll.
ponders what the equivalent of "anti-trust" would be today and if the operatin of central banks is a loophole that has been exploited by those that would otherwise be caught by it.
i guess there isn't an exploited loophole if no-one knows it exists!
The fool is the one going all in on any single form of asset. Hedging should be the gospel in today's "market" like never before. Being all in on dollars or stocks or gold or any other asset is pure folly unless you know for a fact which will be favored (or deemed worthless) by future puppet masters. Hedging will not necessarily allow for getting wealthy but it is the best way to avoid total disaster as well. Ignoring gold is as misguided as going all in on gold.
Please, if someone knows what the outcome of all this will be, stop keeping it a secret and share. I don't have a lot of time left on this earth and I could use a break for my progeny and their care until they reach adulthood.
Sell the S&P GSCI.
You'll thank me later, all in.
Outcome?
We’re all waiting for our Six-Month warning to shoot the place up, I men make ammends… Doc, “Sorry, p00k1e, you have testicular cancer. You have six months….”
“On a long enough time line, the survival rate for everyone drops to zero.” ? Chuck Palahniuk, Fight Club
You can run from the dollar and anywhere you run – housing, investments, savings, life insurance, rentals, a future—its devastation will follow you. You can’t hide.
You can run from the dollar but the people’s whose name is on the dollar will find you.
The entire banking system is built on clay. But the American System was built on people working and trying to do better. The function of labor is powerful and people will someday realize they can do without modern banking's debt-money system. Banking is not ruling.
The first thing the people will need to do is get rid of the international bankers, the Lloyd Blankfeins and Paul Singers and George Soroses and Rothschilds – these leaders of the EU, the Fed, and politicians in America and Europe who are ruining the confidence in governments.
And it can happen instantly…because the banking system is unsound and it can’t be recovered.
“At this point, if you can believe it, the number of Americans getting money or benefits from the federal government each month exceeds the number of full-time workers in the private sector by more than 60 million.” – Michael Snyder on 04/29/2014
http://www.zerohedge.com/news/2014-04-29/real-unemployment-rate-20-american-families-everyone-unemployed
I can believe it and it is a useful ploy by the government in order to keep the current Depression in stealth mode. If not for all of these programs with SNAP cards etc... then the streets would be filled with soup lines and tent cities like the 1930's Depression. You see the photos back then but now the narrative is If you don't see it, then it allows for "plausible deniability".
Gulf Oil spill, anyone see 24 hour a day coverage of oil covered and or dead sealife? I think I've heard more about the Exxon Valdez since the Gulf oil spill than I have about the Gulf.
Anyone see 24 news concerning Fukushima? Where is the coverage and dire catastrophic predictions. Nowadays the only 24 hours news coverage you get is if there is a shooting or a major weather event. Otherwise its all about the Kardashian's.
I don't even blame the government nearly as much as I do the complicit media. Once the media is involved in covering up for the government as opposed to investigating then all is lost. Though I do have to admit the media was all over the "bridgegate" that hurt Gov Christie. I doubt it was a coincidence that he was seen as a formidable opponent of the media's candidate, Hillary Clinton. She certainly enjoys preferential treatment from the media from what I can tell.
The government, the media, the banks are all the same corporations, the same families. The media is a branch of the government and the government is a branch of banking.
See 4 corporations own 99% of all media outlets. See project mockingbird where the cia placed operatives in or bought media companies.
See Glass-Stegall repeal where Senator Gramm repealed the act then became a vice president at UBS.
The door revolves but the faces stay the same. CIA director to wall street hedge fund, NSA director to wall Street, Secretary of the treasury to wall street.
from wall street to wall street from banks to banks from our wallets to theirs.
you think inflation is a rippoff, try life insurance
Insurance is a subclass of Banksting.... Fry them all
Was thinking about hedonic adjustment the other day....like McD's using microcrystalline cellulose (sawdust) as a meat replacement, I wondering if CPI will allow the substitution for hamburger to sawdust to keep that inflation number in check.
Hey, we have to get our roughage from somewhere.
Hold the pickles.
A temporary patch to bide some time. What interests me is when even the cellulose become cost prohibitive. Do we move to silica or does it explode? Does the track, which appears to extend beyond the horizon, represent reality or illusion? Logic seems to dictate it will end, no tree touches the sky but the timing is so frustratingly impossible to see.
Miffed;-)
Gypsum dust. Guys doing drywall in multi-family construction will be sweeping it up to sell by the wheelbarrowl, or in exchange for the fryer oil to make biodiesel.
McD's will call it a mineral nutrition enhancer.
Its got what plants crave!
Miffed;-)
Prices have definitely moved materially higher save for energy in the USA. Gallon of milk has soared in price...so has the price of a dozen eggs.
This does yield...to the extent that consumption still even exists...a lot of cash flow. But all growth still points to the negative going into Winter. In short "all your inflation has been cancelled out by a massive amount of debt creation and outright default."
I give this Administration and this Congress an F- "going on 13 years now."
Great response to 9/11 folks!
Pay no attention to food costs.
... or weed, opium and cocaine prices.
Just one more fake number for a fake economy reporting fake progress.
ZH is riddled with goldfanboyz who are at this moment rethinking their reason for living.
And they can't find too many. 100 straight downticks will do that to ya.
You were warned. Its the barbaric
OMFG - my PM investments are only up 70%. WTF am I ever going to do?
Oh the humanity. . .
Given your handle, I guess nothing is absolute for you anyway.
As it is with all things concerning PMs - It's the barbaric...until it isn't. Gold is the final financial absolute like God is the final existential absolute. Everything else is fiat.
Tail risk grows with each hit. I ain't buying for appreciation or ROI, so it matters not. If anything, the daily price hit is a gift to those intent on accumulating for the inevitable. Reasons for living? If yours is money you're the one who will jumping out of the building. You were warned.
Government? What fuckng government? Are you referring to the Jews that are parading as our government?
as a jew and long time reader of zerohedge since 2008 i will say this; sometimes i do think paid trolls come to this site to sew dissent. yes, there are some genuine anti-semites that are entitle to being asswads, and even francis sawyer got to lurk around until he came back as tony wilson, but then someitimes i see accounts pop out of nowhere to shit on jews iwhtout even explaining anything or giving other commentary.
what if the editors writers and owners of zh were jewish? every think of that?
given that one of the head guys of zh is russian and worked on wall street, it stnads to reason zh may have well been started by a jew!
<<what if the editors writers and owners of zh were jewish? every think of that?>> No, I never thought of that. It is a good question.
Now that I think about that..... it would not bother me one bit. I have no problem trusting Jews. I have done so all of my life and I have no fear doing so again ----- ceteribus fucking paribus. I will teach my children to be as wise as serpents as they face all mankind.
I reckon that 99% of ZH readers here know damn well that "Judaism" is just as diverse as "Christian" or "Islam" or "Buddhism" or "Keynesianism" or Rock and or Roll. I am proudly a religious man myself and I have to reconcile the fact that my own "Church" is possessed by the devil. [My Church needs a TonyWilson attack too.] I see a common enemy in lots of different denominations. I see my Savior as having physically lashed out at them and only them. For a Man who manifest divine impulse control, I say He clearly identified our enemy for us. He did not lash out at the "Jews" but rather He lashed out at the money-changers.