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Back Out Housing Adjustments, and Core CPI = 5.3%

Posted By Barry Ritholtz On October 17, 2005 @ 9:52 am In Economy,Inflation,Real Estate | Comments Disabled

Adjust this!

We visited the issue of  BLS "Owners Equivalent Rent" in CPI back in May [1] (and several times since [2]). But we never did the heavy lifting as to exactly what the magical core rate would be if we back out the misleading BLS adjustment

Kudos to Tim (themessthatgreenspanmade [3]) for rolling up his sleeves and doing the hard work of actually calculating what the core rate would be [4] without the absurdity of the BLS hedonic adjustments: We end up with a Core Rate of 5.3%

Cpiandhomeprices [5]

Put that in your Hedonic BLS Modelling pipe and smoke it . .  .

UPDATE:  OCTOBER 17, 2005 10:26 AM

I abuse the term Hedonics [6] to refer to ANY adjustment to price based on a rationale of logic (or illogic), rather than the focus on actually price. 

It is technically more precise to say that the Owner’s equivalent rent is a decision made in the process of designing the BLS CPI model — and less a true Hedonic adjustment.

Antony Mueller of the Ludwig von Mises Institute [7] has an excellent explanation of how BLS abuses Hedonics here [8].

Home Ownership Costs and Core Inflation [4]

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/10/back-out-housing-adjustments-and-core-cpi-53/

URLs in this post:

[1] May: http://bigpicture.typepad.com/comments/2005/05/how_housing_low.html

[2] since: http://bigpicture.typepad.com/comments/2005/06/rent_vs_cpi.html

[3] themessthatgreenspanmade: http://themessthatgreenspanmade.blogspot.com

[4] actually calculating what the core rate would be: http://themessthatgreenspanmade.blogspot.com/2005/10/home-ownership-costs-and-core.html

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/cpiandhomeprices.jpg

[6] Hedonics: http://www.bartleby.com/61/24/H0122400.html

[7] Ludwig von Mises Institute: http://www.mises.org/

[8] how BLS abuses Hedonics here: http://www.mises.org/story/1873

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