This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Truth About Inflation

Doctoring the Data

While commodities and education are being undercounted, housing actually lowers inflation readings. Tony Crescenzi addressed this relationship earlier this year in an article called " How Housing's Surge Is Suppressing CPI ."

The way BLS accounts for housing expenses is an oddity that creates all sorts of problems. Before 1983, CPI measured housing inflation by looking at what it actually cost to own a home: house prices, mortgage rates, property taxes, even maintenance. After 1983, BLS changed the housing component, using the concept of "owner's equivalent rent." It's a measure of what homeowners could get for their homes if they rented them. It accounts for 23% of the overall CPI and about 30% of core prices, according to BLS.

Since the housing market began soaring, rental properties have languished. Vacancy rates rose, and rents came down in price. This had the surreal effect of pushing CPI measures down. At exactly the time housing became extremely expensive, the BLS measure of this component made inflation appear to be going lower.

What happens to the CPI inflation if we back out this absurdity? Tim Iacono, host of the blog The Mess That Greenspan Made, did the number crunching. As the chart below shows, if we revert back to the pre-1983 measure of housing costs, the core CPI spikes to a more realistic 5.3%.

Click here for larger image.

The CPI's miscalculation is even worse than you might imagine. As utility costs go up, inflation is further under-reported in the CPI (core or headline). Why? BLS perversely removes the value of any landlord-provide utilities in its calculation of owner's equivalent rent.

And you wondered why I mock the Labor Department's statistical methodology. Talk about adding insult to injury.
2 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $93.24 -0.41%
FB $117.81 -0.21%
GOOG $701.43 0.82%
TSLA $211.53 -4.96%
YHOO $36.94 2.61%


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs