And so it begins . . .

Tuesday, July 25, 2006 | 07:33 AM

If ever I were to go on a murderous, cold-blooded rampage, killing God knows how many, only to be gunned down by the police in the act, someone, somewhere will surely ask "Why did this happen? What could have set him off?"

Were that to ever happen, dear readers, I want you to point to this recent article (from Reuters) as the prime causative factor:

"Federal Reserve officials scrutinizing the latest inflation numbers are facing an inconvenient truth -- all of them have risen...

In a study released this week, the Dallas Fed noted that the fraction of components experiencing annualized increases of more than 3 percent had grown to 57 percent, from 33 percent in December.

The findings, presented in chart form, argue against the idea that gains in a measure of housing costs -- or owners' equivalent rent -- have had an outsized impact on inflation that masks a less-menacing underlying trend.

"Rather than identifying a single component to blame for the recent pickup in core inflation, chart 5 suggests an explanation more akin to the resolution of Agatha Christie's 'Murder on the Orient Express' -- they all did it," it said."

So far, I am in agreement -- we have seen inflation a variety of components across the board. Housing is an important component of inflation, not to be ignored. Also of note, the assinine habit of stripping out Energy and Food, which the author of this piece specifically details:   

"The practice of focusing on inflation without factoring in food and fuel has its critics, not least because such purchases make up an important part of the household budget and deserve consideration if they keep heading higher.

As a result, there are other semi-official measures of inflation that try to exclude volatile components in the inflation basket, while avoiding any systematic bias.

So far, so good. We now lead up to the root cause of a potentially murderous rampage.  Here's the latest bit of stupidity, which actually defies my ability to describe it without breaking down into a sputtering rage:

"Prices have risen more in the past three months than in the preceding three months, regardless of whether owners' equivalent rent is included or excluded," noted economists at Goldman Sachs in a recent note to clients.

The U.S. Labor Department is tinkering with an experimental price gauge that strips out owner-occupied housing costs to offer an internationally comparable inflation, according to a study released this week." (emphasis added)

Before I put in my order for armor piercing bullets, perhaps cooler heads will prevail. Thank goodness for this chart, via Birinyi Associates, that puts the cost of housing into context of other inflationary items: 


click for larger graphic


courtesy of Birinyi Associates

The chart makes it readily clear to anyone but the most pigheaded bureaucrat or partisan advocate that housing is the single largest component of inflation over the past 6 years. This is most likely due to two key factors:

1)  Housing is typically the largest item in a household budget -- far larger than food or energy;

2) Rates cut to half century lows sparked the biggest housing run up seen in decades.

Hence, it readily apparent (at leats to those who can see) that over the past 6 years, inflation was actually far greater than official government reports claimed it to be.  The blame for that is Housing, and the mechanism for under reporting it is the Owner's Equivalent Rent.

After this 6 year lapse, the present tinkering appears to be little more than another attempt at reporting Inflation ex inflation

Ok, I feel better now. Crisis averted . . .


U.S. inflation gauges are all pointing upward
Alister Bull
Reuters, Thu Jun 29, 2006 1:41 PM ET

Tuesday, July 25, 2006 | 07:33 AM | Permalink | Comments (30) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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Tracked on Jul 25, 2006 7:36:49 PM


After watching the Fed's explain away the historic increasing in housing prices using the bogus "owner's equivalent rent" scam, I was wondering what would happen when the shell game ended. No we know. Why isn't anyone else talking about this? Can I join you on your rampage?

Posted by: Bob | Jul 25, 2006 8:16:32 AM

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