Why don’t rising house prices count towards inflation?

Property values have increased much faster than other costs of living | The Economist explains

8/3/2021 4:44:00 AM

Governments should sort out the inefficiencies in today’s housing markets, rather than make them somebody else’s problem

Property values have increased much faster than other costs of living | The Economist explains

is systematically understated. New Zealand’s government has asked the central bank to explain the impact its interest-rate decisions have on house prices. And the question of whether rising housing costs were getting enough attention was a significant theme in the European Central Bank’s (ECB) recent

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strategy review.Governments first paid proper attention to measuring inflation around the time of the first world war, when they knew prices were rising and wanted to make sure workers’ pay kept pace with living costs. Initially the indices were focused on food prices, but more goods and services were added over time. The list would typically be reviewed regularly, but some elements, like housing, were hotly debated. House prices were included in America’s CPI between 1953 and 1983 before being removed. This was partly because indexing benefits and pensions to inflation had become expensive and some politicians wanted to bring measured inflation down.

So why doesn’t CPI include house prices? Inflation is a measure of the costs of buying goods and services for consumption today. A house provides shelter and security to those who live in it, but the value of those services is dwarfed by the price of the house. So buying a house is about investment rather than current consumption. Although some goods in the inflation basket, such as cars and refrigerators, also yield services over several years they typically depreciate faster than a house, and so the difference between the value of the services and the price paid is much less extreme. (Houses do depreciate over time but not to zero. If you did no repairs on a house it would lose much of its value although the land it stood on would not.) That is not to say that inflation measures should ignore housing altogether. Most existing measures include the cost of renting and maintaining a property, since those involve consuming a service today. Some more sophisticated indices include other housing costs too, such as mortgage-interest payments or an estimate of the rent that owner-occupiers sacrifice by living in the house rather than renting it. These perhaps hint at measures the ECB might start to emphasise in the future—the “consumer cost of an owner-occupied house”, not the property’s price. headtopics.com

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Great question. Governments need to create measuring sticks that truly reflect the cost of living. A student today needs to have access to the Internet. What Government includes this manditory expenditure? Or again they are an Asset, so maybe no. They should! That's because Mr. Inflation does not know people are moving to smaller places. He doesn't care if you are paying the same for a smaller chocolate bar either. All he cares is how much more u are spending on those items regardless of the size, quality and level of joy.

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