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The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't

by j_m_b 4y ago

The Fed doesn't use the CPI, they use the PCE. The PCE is calculated based on rental prices, not home prices. I should have said more accurately that they don't include the PRICE of homes in their inflation measurement. It seems like it would be quite important when you are holding 2T in MBS.

jacobolus 4y ago
The “price of housing” is also a very large proportion of the PCE. I am not sure what percentage of the total it makes up this year (maybe you can figure that out with more searching), but I believe it is broadly comparable to CPI. The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined. Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses. > As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.

by j_m_b 4y ago

jacobolus 4y ago

The “price of housing” is also a very large proportion of the PCE. I am not sure what percentage of the total it makes up this year (maybe you can figure that out with more searching), but I believe it is broadly comparable to CPI. The PCE is computed by the Bureau of Economic Analysis (part of the Commerce department; BLS is part of the Labor department). Like the CPI, the PCE includes both Rental of tenant-occupied nonfarm housing and Imputed rental of owner-occupied nonfarm housing among its categories. The estimates of these (and other) individual categories in the PCE are directly lifted from the CPI. The main thing that differs between the two in my understanding is how the categories get combined. Property values are not really directly relevant for an inflation index, because property values are not directly reflected in monthly personal expenditures. What matters (and gets counted) is the price of people’s housing-related expenses. > As noted in Chapter 2 purchases of newly constructed housing are treated as private fixed investment rather than as consumption expenditures in the NIPAs, and the stock of housing is treated as fixed assets. The housing stock provides a flow of housing services that are consumed by persons who rent their housing and by persons who own the housing they occupy (referred to as “owner-occupants”). In the NIPAs, owner-occupants are treated as owning unincorporated enterprises that provide housing services to themselves in the form of the rental value of their dwellings. Thus, PCE for dwelling services includes both the monetary rents paid by tenants and an imputed rental value for owner-occupied dwellings (measured as the income the homeowner could have received if the house had been rented to a tenant). This treatment is designed to make PCE (and GDP) invariant to whether the house is rented by a landlord to a tenant or is lived in by the homeowner.