They did not take housing expenses out, which is what many people whose sole exposure to economics is via memes seem to think/be encouraged to think.
This means that as interest rates rise, housing expenses may spike - forcing employees to demand more money. Given the size of the housing budget in many households, this effect could be surprisingly strong.
I don't think the CPI methodology makes any assumption about elasticity of any particular component, though; it's a measurement process. People who are making interpretations or predictions based on CPI might be using faulty assumptions.
But headlines like this serve to reinforce the notion that somehow the "official" inflation figures are wrong. Which gives power to politicians who deliberately push this narrative; which is to day, dishonest ones.
The fact is, lots people hear that "housing prices" aren't included in the CPI, and interpret that as housing costs are not included. There is no nuance for most people; for them, housing "prices" and housing "expenses" are the same thing.
Normal people who are not economists or interested in economics at all are voters. It behooves people in the industry to speak clearly and plainly about these topics. Failure to do so hands that opportunity over to unscrupulous pundits who will speak plainly, but with a bend that favors their political opinions.
However, I'm not sure that's the struggle people have. From what I observe, they question if CPI is the best metric for measuring inflation, not whether or not durable assets should be considered consumables.
That is just a technicality. Housing is the greatest one time and recurring expense most people have and change in prices for housing has the greatest impact on their perception of how expensive things are.
I don't think the CPI is meant to capture people's perception of how expensive things are. If their perception differs from the reality of what they're consuming, it's more important for CPI to track the consumption than the perception.
"The CPI is wrong because it doesn't match people's perception" doesn't make much sense to me.
Taken into account, at least in Canada:
> In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses.
> Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?"
* https://www.statcan.gc.ca/en/blog/cs/shelter-cost
See notes on 2021:
> The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021.
> The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements.
* https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...
That's the problem with house prices, regardless of whether or not you think they should be included in CPI, being that the average person is likely to only buy one or two in their life, leaving very little data about how their perception has changed over time. The best reason for choosing a measure of consumables is that they are purchased frequently by most people, providing information about how perceptions are changing on a regular basis.
> has the greatest impact on their perception of how expensive things are.
That would be more significant if we were talking about cost of living, but since we're talking about inflation, the actual goods selected in the basket don't matter all that much. The basket just has to be large enough to filter out the noise of individual products that have increased in value at a rate faster than the currency (or vice versa). And as it pertains to Canada, housing has appeared to be especially noisy of late, making it a poor choice for tracking inflation even ignoring all of the other problems with it.
Right. Inflation is supposed to be a measure of erosion in purchasing power. Why should we leave out durable assets (which are purchasable things) from that measure and only consider consumable things? I get that's not CPI's intended purpose, but then why do people use it for defacto inflation?
Housing prices are not considered in the CPI ("cost of living") because houses are mostly an asset. Cullen Roche has had some good stuff on the topic:
> House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance).
* https://www.pragcap.com/forum/topic/assflation/#postid-2165
* https://web.archive.org/web/20210929154549/https://www.pragc...
> The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. […]
> Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs.
* https://www.pragcap.com/should-house-prices-be-in-the-cpi/
The "C" in CPI stands for consumer. Houses aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live.
'Shelter' is considered in the CPI generally though:
* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...
For the homeowners' replacement cost, at least in Canada:
> In measuring changes in the cost of owned accommodation, Statistics Canada considers six essential components: mortgage interest cost; replacement cost; property taxes; homeowners’ home and mortgage insurance; maintenance and repairs; and other owned accommodation expenses.
> Rather than looking at the price of purchasing a house, the idea is to treat a homeowner as if they are renting their own dwelling, and track any expenses that a landlord would normally incur. As Fred Barzyk, Director of Consumer Prices Division explains, the question we want to answer in the shelter index, is “what does it cost to run your home?"
* https://www.statcan.gc.ca/en/blog/cs/shelter-cost
See notes on 2021:
> The owned accommodation price index (+4.1%) rose at a faster pace than the rented accommodation price index (+1.7%) in 2021.
> The upkeep of a property, or the homeowners' replacement cost, was up 11.4% on an annual average basis, compared with a 2.0% increase in 2020. The homeowners' replacement cost, a key driver of owned accommodation price growth, is linked to the price of new homes. New home prices rose consistently throughout 2021. The homeowners' replacement cost increased the most in Manitoba (+17.6%), with Prince Edward Island (+14.7%), Quebec (+14.3%) and Nova Scotia (+12.1%) also recording strong annual average movements.
* https://www150.statcan.gc.ca/n1/daily-quotidien/220119/dq220...
Focusing on subtle technical differences is not helpful for laypeople. Consider if you had a tire that kept going flat, so you take your car to the mechanic and tell them, "something is wrong with my wheel" then having them come back and say, "no there isn't." Because, technically to the mechanic, tires are the rubber part and wheels on the metal part, and there is nothing wrong with the metal part.
That's what people are doing by saying "house prices aren't included" in the CPI. While technically correct, the implication to normal people is that the costs associated with shelter are completely omitted from the CPI.
There is plenty of genuine spirited debate to be had over the basket of goods. There is room for using one indicator over another for any given application. Even against that backdrop shadowstats is clearly just a grift.
Absolutely, but this kind of debate needs to be done in good faith and with the understanding that whatever new basket of goods one comes up with is unlikely to be applicable to any more people in the economy.
The basket of goods is like a a medium shirt. It's not going to fit anyone very well, and it won't fit most people at all. Swapping the shirt out for a large isn't going to improve the fit for people as a whole, it will just change the people who fit in it.
The curse of dimensionality rears its head when talking about "averages" over a number of dimensions. There's not really a good methodology to distill such a complex topic down to a single figure.
https://fullstackeconomics.com/no-the-real-inflation-rate-is...
tldr: they don't actually reconstruct the old methodology. They add a fudge factor based on how much they think the new methodology increases the inflation rate. And that estimate is based on a basic math error.