Hello Fed, Inflation is Rampant and Obvious, Why Can't You See It?


Year-over-year home prices are up 11.2%, some cities even more. The Fed does not see this or count it if they do. Let's discuss why.

Home Prices Rise at Fastest Pace in 15 Years

Home prices are running rampant. The national level average year-over-year increase is 11.2%.

Prices have accelerated in the past few months. I discussed the year-over-year acceleration in Home Prices Rise at Fastest Pace in 15 Years

National and 10-city averages do not tell the full story as the lead chart shows. 

Inflation Disconnect

CS National Top 10 Metro CPI OER 2021-01

Owners' Equivalent Rent

OER stands for Owners' Equivalent Rent. 

Prior to 2000, home prices, Owners' Equivalent Rent (OER), and the Case Shiller national home price index all moved in sync.

This is important because home prices directly used to be in the CPI. Now they aren't. Only rent is. 

Yet, OER is the Single Largest Component of the CPI with a weight of 24.07%.

In effect, economists substituted rent for home prices in the CPI. Prior to 2000, this did not matter. Now it seriously distorts measures of inflation.

The rationale is home prices are a capital expense not a consumer expense. 

What Should We Measure?

What is it we are measuring or need to measure? 

I suggest we need to measure inflation, not just consumer inflation. 

Home Prices, OER, and CPI Percent Change

CS National Top 10 Metro CPI OER Percent Change 2021-01

Year-Over-Year Percent Changes

  • National Home Prices: 11.2%
  • 10-City Average: 10.9%
  • OER: 2.2%
  • CPI: 1.4%

The CPI allegedly is up a mere 1.4% from a year ago as of January 2021. Let's calculate inflation by substituting home prices for OER in the CPI as it used to be.

I call the result CS-CPI for Case-Shiller-CPI.

CPI, CS-CPI National, CS-CPI Top 10

CPI, CS-CPI Percent Change 2021-01

Economists claim inflation is up a mere 1.4% year-over-year as of January 2021. 

If we substitute home prices for OER as it used to be (and is far more accurate as well), inflation is up 3.8% from a year ago. 

Having calculated inflation far more accurately than widely believed (yet still understated), we can calculate real interest rates. 

Real Interest Rates

Real Interest Rates CPI as of 2021-01

To determine "real" interest rates, subtract CPI from the Fed Funds Rate.

  • Real Interest Rate as Touted: -1.31%
  • CS-CPI 10-City: -3.59%
  • CS-CPI National: -3.67%


Q: With real interest rates close to -4% is it any wonder asset prices and speculation are booming?
A: No
Q: Why can't the Fed see this?
A: Possibly the Fed can see this. If so it's on purpose. 

The Fed wants inflation and numerous Fed members are openly in praise of it.

Easy Money Quote of the Day: Fed "Won't Take the Punch Bowl Away"

On March 25, I noted the Easy Money Quote of the Day: Fed "Won't Take the Punch Bowl Away"

Numerous Fed presidents made speeches. I awarded gold, silver, and bronze medals for the best "easy money" quotes.

San Francisco Fed President Mary Daly won the gold medal. She said the central bank would show at least “a healthy dose” of patience. ”We are not going to take this punch bowl away,” said Daly.

Does the Fed Understand What They Are Doing?

I don't know. Either the Fed is blindly ignorant of what's going on, or it's on purpose. Take your pick.

The result is a big set of bubbles, whether the Fed sees them or not. 

2% Inflation Target

The Fed's 2% inflation target is monetary insanity.

Full speed ahead with the stimulus in search of inflation that would be visible to anyone who was not wearing groupthink blinders.

I have a set of questions for Fed Chair Jerome Powell on inflation. Please read them: Hello Jerome Powell We Have Questions.

Historical Perspective on CPI Deflations

A BIS study of deflations shows the Fed's fear of deflation is foolish.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive," concluded the study.

For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?

Japan has tried what the Fed is doing now for over a decade, with no results.

Yet, Powell hell bent on producing more than 2% inflation until the strategy "works".

I discuss numerous ways Powell is on the Bank of Japan's path in Is the Fed Blindly Following Failed Policies of the Bank of Japan?

What Would I Do?

For the answer, please see Reader Question: What Would I do Differently Than the Fed?


Comments (44)
No. 1-17
Lance Manly
Lance Manly

The problem is that the real interest rates result in low monthly payments despite the increase in prices. If the 10 year continues to increase, which the Fed does not seem concerned about, prices will correct to keep the payments in line with what people can pay.


Medium to long term home prices are superior to rent as a price level metric but short term they can reflect bubbles in real estate.


You are pretending that the Fed actually wants to do something for the Average Joe. The Fed is in business to protect their shareholders the big banks.

Clinton started all this shenanigans with the CPI in order to minimize outflows to Social Security receipts.

It is in the Fed's interest to manipulate rates if inflation is cranking up they will have to raise rates and housing will dive along with many other interest rate sensitive business.


Why can't the Fed see it? An old Upton Sinclair quote springs to mind, that it's difficult to get a man to understand something when his salary depends on not understanding it.


This is why I sold all my Tips. I foolishly believed they would honor the investor's desire for a small stipend above inflation. I was wrong.


Some groups, like the US government, would be screwed if the Fed stopped creating money. So they're going to ignore all warning signs and just keep doing it.


The biggest problem right now is labor. One the one hand, low end labor is getting free money from the gov and on the other end there isnt enough skilled labor (engineers, law, techonology, etc.) to fill current demand and we are still partially shutdown. What is going to happen when we go to full recovery?

Inflation for labor is going to explode if we get past covid this year and if not this year, next year. Keep in mind we have a global aging demographic and there isnt enough people to do the work that needs to be done.

Once wage inflation hits it will drive the cost of all goods and services to the moon.

We all had a good laugh at $15/hr min wage but in 5 years we may be well past that or we will be in a great depression. I see no middle ground.


The economics profession has been apologists for the rigged system since Joseph Smith said greed is good.


I think that there are two types of inflation. Monetary inflation i.e. too much cash, and boom inflation when the economy runs up against supply constraints.

The Fed knows that they only have the first kind, but what they want is the second kind to avoid a hideous debt deflation collapse. So they allow the asset inflation and so on, to continue because they hope that the trickle down, fingers crossed, stimulus checks, miracle from the Lord, green eco cars, will eventually cross over the line and become boom inflation to cover up the horrible debt mess.

And its now the only hope left so they must continue. Whats scary about the situation is that so many don't think the Fed plan will work in which case we go into a huge economic crash. Having said that the dollar is not particularly weak against other currencies so nobody that actually has money is of the opinion its going to dramatically collapse just the usual skint armchair bandits (puts own hand up).


@Mish I think maybe Lyn Alden has been reading you:

"The long-term structural trend is towards lower inflation or outright deflation, and normally, that would be a good thing. As humanity’s technology progresses and productivity improves, it would be natural for your money to buy more goods and services than it could 5 or 10 years ago, rather than less.

However, because we structured our economy around a debt-based system, deflation is viewed by policymakers as the biggest enemy; something to be fought off wherever it shows up, so they seek to counter that inherently deflationary trend with inflationary monetary and fiscal policy."



I have been following this blog for many years now. One reason is because of the work that Mish puts-in to topics such as this. I really appreciate it, because I would never bother to spend much time on topics like this myself.

However, as much as I appreciate it, it is not because I want the Fed to change course, or to do what Mish thinks is right, or to be dissolved. It is because I want to better understand the reality that we live in. I learned long ago that it is better to understand reality and adapt to it, than to waste my time trying to fight it, or pretend it will go away if you just elect a certain politician or party.

Having said that, my question is:

Assuming that the Fed is going to continue to “do whatever it does to promote inflation”, what course of action should an individual pursue to best adapt to that reality?

I would be interested in hearing what people here feel is the best strategy to deal with the reality of the Fed policies, and their pursuit of inflation.


However reckless Fed policy is, the dollar is strengthening against the other currencies (even gold). This is even after the fiscal stimulus of just printing money and giving it to everyone.

I'm wondering what it will take to weaken the dollar.


CPI doesn't include interest expense either. The interest I pay on my mortgage has dropped by 40% in the last year. Interest on auto loans has dropped similarly. Seems like CPI should account for those items.


Fed needs to stop buying treasuries and raise interest rates so the housing market will adjust its bubble inflationary prices.


"home prices are a capital expense not a consumer expense" How can other things ever be consumed when all that you make goes to capital?


stonks is all i care about.


It's the debt! The Fed needs to prop asset prices in order to support the mountain of leverage that they have allowed to build, ironically, in order to prop up asset prices. (Uggh, there's that ugly feedback loop, but let's not talk about that).

So the Fed will only focus on the tame, and highly manipulated and smoothed, PCE and CPI measures, in order to avoid having to increase rates, which would derail their master plan and collapse the economy.

Clearly, one of the unintended consequences is that massive income (and asset) inequality will continue to increase. But that, unfortunately, is a necessary consequence that the Fed is wholly unable to consider, let alone address, as it continues its idiotic game plan to try to inflate away the mountain of debt. Which, of course, will only continue to grow.

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