Independent economists challenge the government’s housing cost calculation, suggesting a lower inflation rate than reported.
Inflation may be significantly lower than what the government has been reporting, according to a group of researchers. These independent economists argue that there is a fundamental flaw in the government’s methodology for calculating inflation, and the real inflation rate could be as low as 2.78%. This revelation challenges the widely-watched Consumer Price Index (CPI), which currently stands at 4%.
Last week, SMR Research Group, a market research company based in New Jersey, introduced a new measure of inflation. Their approach involves revising how housing costs are factored into the calculation. By their estimation, the real inflation rate aligns more closely with the 2% target set by the Federal Reserve. This lower rate is seen as favorable for job creation and maintaining a stable economy compared to the current 4% official rate reported by the CPI.
The researchers at SMR Research Group take issue with the largest component of the official inflation rate, known as Owners Equivalent Rent (OER). OER is intended to account for housing costs for homeowners, but it does not reflect actual expenses incurred by individuals. Currently, OER is increasing at a rate of 8% per year and contributes significantly to the core CPI, which excludes food and energy prices.
The Bureau of Labor Statistics (BLS) excludes mortgage payments from estimating homeowners’ costs, considering them as investments rather than consumption costs. Instead, the BLS measures rental costs in a given area and calculates OER as the hypothetical amount of rent homeowners would pay if they were renting their homes instead of living in them.
Stuart Feldstein, co-founder of SMR, criticizes the BLS method as “insane” and argues that the high price of housing only affects consumers who have recently purchased a home, which is not the case for the majority of people.
SMR Research Group utilizes a simpler method to estimate housing costs by examining data on mortgage payments and property taxes. Their dataset encompasses information on 53 million owner-occupied homes, providing insights into the real changes in expenses homeowners face. This method acknowledges that individuals with fixed-rate mortgages experience minimal to no housing inflation, while recent homebuyers face higher costs.
Feldstein emphasizes the significant impact of inflation on homeowners based on mortgages and property taxes. For existing homeowners, there is either no change or a situation where they acquire a house from a previous owner at a significantly higher price and interest rate, resulting in a substantial increase in their mortgage payments.
When calculated using this alternative approach, housing inflation for homeowners is estimated at 3.21% over the year, considerably lower than the official 8% OER figure.
The revelation of this flaw in the government’s inflation calculation methodology raises questions about the accuracy of reported inflation rates. It underscores the importance of considering different methodologies to capture the real impact of housing costs on consumers.
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