Forum Navigation
You need to log in to create posts and topics.

AssFlation vs Shelter

Hi @cullen-roche,

I keep reding from (hyper)Inflationistas that the CPI is all wrong because it does not take into account AssFlation (funny term from your post), and only tracks Shelter expenditures. Is the Fred graph (attached or below), the correct one tthat differentiates Housing AssFlation from Shelter (rental) prices?

Uploaded files:
  • Shelter-vs-HomePrice.png

House prices are an interesting case. Houses are considered capital investment by the 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).

I would argue that there are elements of consumption in housing in the sense that you need to maintain the house. So you do consume your house in a way.

But I don't see much convincing evidence that QE drives home prices higher. Or rather, I would be careful assigning causation from QE. QE might play a tangential role in impacting prices, but there are other factors that play a much more important role here. The way everyone seems to assign causality to the Fed is putting the cart before the horse.

hugo has reacted to this post.

Hi @cullen-roche, @hugoup

Three classes of assets are treated differently in national accounting.

  1. Non-financial produced assets consist of  all goods and services  produced in GDP, for example, renting shelter(service), building structures (investment), ...
  2. Non-financial non-produced assets consist of natural resources for example, lands, minerals, ...
  3. Financial assets consist of all assets in financial instruments

Inflation indicators CPI, PCE, GDP Implicit Price Deflector are used for measuring Non-financial produced assets and for estimating the quantity of real GDP.  One important accounting identity is PQ=Y, where P is GDP Implicit Price Deflector, and would not count non-financial non-produced assets such as lands.

Home prices consist of  land value and building structure value on home land.  Home prices drive up mainly by house land values if nearby business is booming, not by building structure values. But land values are not counted in CPI, PCE, GDP Implicit Price Deflector since lands are non-financial non-produced assets. This is why home price index is often higher on CPI price index.

QE may impact financial asset values due to different interest rates in financial instruments, but not impact non-financial asset inflation.  While interest rates are borrowing costs for borrowing financial assets, inflation rates are buying costs for purchasing nonfinancial assets.

hugo has reacted to this post.