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Asset prices (house prices, stocks, etc. ) are not calculated into inflation, nor they should be. Only rents, and costs of maintaining houses are a part genera

by nabla9 3y ago

Asset prices (house prices, stocks, etc. ) are not calculated into inflation, nor they should be. Only rents, and costs of maintaining houses are a part general level of prices for goods and services.

lotsofpulp 3y ago
So official inflation statistics should not be applicable to people interested in purchasing assets, such as land? I am not understanding the reasoning. Since most goods and services flow through the largest publicly listed companies, I consider equity market indexes like VTI or VOO to be a better gauge of inflation over the course of decades. It has been my experience that the prices I pay for things like land, daycare, education, healthcare, and even services like electricians/plumbers/other specialized labor follows the increase in equity markets, at least in my high cost of living area. Also, the government will backstop equity prices by reducing the purchasing power of the currency, so that also tells me equity prices are tracking purchasing power.
- nabla9 3y ago
  OK. > I am not understanding the reasoning. .... I consider equity market indexes like VTI or VOO to be a better gauge of inflation Ask yourself: What use would be an inflation measure that takes into account asset valuation?
  - lotsofpulp 3y ago
    If one’s goal is to acquire the asset (like land/house), then it seems relevant. Additionally, when one’s government has a goal of increasing equity prices even at the expense of the purchasing power of the currency, it seems like one has to be invested in assets to keep up.
  - deleted 3y ago
    [deleted]
viraptor 3y ago
House prices are correlated to rent, because the higher rent you can get, the more the house is worth as an investment. So in theory they're not included... but in practice yeah.
pzo 3y ago
With this logic we should also exclude prices of cars, computers because that’s also an asset that you can just rent rather than own. Houses used to be included few decades ago in inflation calculation - this sounds more like trying to hide how much price increases. Similar things happen in taxation. In EU in many countries you have Brutto salaries that includes employee contribution for healthcare, but most people don’t know that employer on top of that pays also another half. So when people calculate their after tax salary they thing that only 35% is tax when in real life it’s 45%. Include VAT, duty tax, excise and easily you pay 60% taxes. If politicians would make this clear with just one single 60% tax most people would be furious and go to street - that’s why they are using this salami strategy.
- sokoloff 3y ago
  The cost of housing (the consumed service/utility) is still included in CPI calculations. The cost of houses (the durable structure sitting on land) is not. https://news.ycombinator.com/item?id=36534866 https://news.ycombinator.com/item?id=36534866
- nabla9 3y ago
  > cars, computers because that’s also an asset that you can just rent rather than own. Those are not investment assets. They deprecate towards zero. The CPI is not supposed to include investments, and owning a house has aspects of both investment and consumption. Until 1983, the CPI included housing costs, but it was changed because it screws up what is measured. The current method is better. The current measure takes into account owners’ equivalent rent. It's based on the trend of costs to rent a home, not to buy one.
  - pzo 3y ago
    Houses shouldn’t be investment. Anything could be investment. We had many bubbles in the past like tulip. It’s just tulip are not essential to live. You can imagine having idea to make cars also an investment and buying all available cars as investment. Normally market will try to make up the demand and build more cars but with houses it’s more complicated because you wanna live where is infrastructure - and that takes decades to build. From recent examples when Covid started everyone was “investing” in hand sanitizers, masks, gloves - it was crazy expensive and so short in supplies that even pharmacies couldn’t get it from wholesellers - scalpers instead where making a killing . But you cannot just ramp up house production that fast.
onlyrealcuzzo 3y ago
Here's a fun thought experiment - ask yourself what happens if the Fed drops interest rates to -1000%, and home prices & equities go basically to infinity... Anyone who owned equities or houses before the interest rate move is set for life, anyone who didn't lost basically all of their savings. It's interesting how many people try to explain away this with Fed-speak and pretend it doesn't matter.
- maxerickson 3y ago
  Doesn't the value of $1 go to infinity also? What's the value of the thought experiment?
- nabla9 3y ago
  That would change only nominal valuation, not real values. Nobody becomes richer or poorer when nominal value of currency changes. btw. Central banks interest rate can go negative only little until it becomes cheaper to hold money assets or transfer them to other assets. Nobody holds cash if interest rate is -5%. This is why deflationary spiral can't be countered with just going below zero.
sokoloff 3y ago
Rents and owner-equivalent-rent are included in CPI calculations as the cost of shelter. https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htm#:~:text=Owners'%20equivalent%20rent%20of%20residences,which%20CPI%20data%20are%20published https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an....
- nabla9 3y ago
  As I wrote. That is an attempt to capture the cost of renting, not buying a house.
HWR_14 3y ago
That's not true. Inflation measures for homeowners don't take into account maintenance, they use what the fair-market rent of your house would be.

by nabla9 3y ago

lotsofpulp 3y ago

So official inflation statistics should not be applicable to people interested in purchasing assets, such as land? I am not understanding the reasoning. Since most goods and services flow through the largest publicly listed companies, I consider equity market indexes like VTI or VOO to be a better gauge of inflation over the course of decades. It has been my experience that the prices I pay for things like land, daycare, education, healthcare, and even services like electricians/plumbers/other specialized labor follows the increase in equity markets, at least in my high cost of living area. Also, the government will backstop equity prices by reducing the purchasing power of the currency, so that also tells me equity prices are tracking purchasing power.

nabla9 3y ago
OK. > I am not understanding the reasoning. .... I consider equity market indexes like VTI or VOO to be a better gauge of inflation Ask yourself: What use would be an inflation measure that takes into account asset valuation?
- lotsofpulp 3y ago
  If one’s goal is to acquire the asset (like land/house), then it seems relevant. Additionally, when one’s government has a goal of increasing equity prices even at the expense of the purchasing power of the currency, it seems like one has to be invested in assets to keep up.
- deleted 3y ago
  [deleted]

viraptor 3y ago

House prices are correlated to rent, because the higher rent you can get, the more the house is worth as an investment. So in theory they're not included... but in practice yeah.

pzo 3y ago

With this logic we should also exclude prices of cars, computers because that’s also an asset that you can just rent rather than own. Houses used to be included few decades ago in inflation calculation - this sounds more like trying to hide how much price increases. Similar things happen in taxation. In EU in many countries you have Brutto salaries that includes employee contribution for healthcare, but most people don’t know that employer on top of that pays also another half. So when people calculate their after tax salary they thing that only 35% is tax when in real life it’s 45%. Include VAT, duty tax, excise and easily you pay 60% taxes. If politicians would make this clear with just one single 60% tax most people would be furious and go to street - that’s why they are using this salami strategy.

sokoloff 3y ago
The cost of housing (the consumed service/utility) is still included in CPI calculations. The cost of houses (the durable structure sitting on land) is not. https://news.ycombinator.com/item?id=36534866 https://news.ycombinator.com/item?id=36534866
nabla9 3y ago
> cars, computers because that’s also an asset that you can just rent rather than own. Those are not investment assets. They deprecate towards zero. The CPI is not supposed to include investments, and owning a house has aspects of both investment and consumption. Until 1983, the CPI included housing costs, but it was changed because it screws up what is measured. The current method is better. The current measure takes into account owners’ equivalent rent. It's based on the trend of costs to rent a home, not to buy one.
- pzo 3y ago
  Houses shouldn’t be investment. Anything could be investment. We had many bubbles in the past like tulip. It’s just tulip are not essential to live. You can imagine having idea to make cars also an investment and buying all available cars as investment. Normally market will try to make up the demand and build more cars but with houses it’s more complicated because you wanna live where is infrastructure - and that takes decades to build. From recent examples when Covid started everyone was “investing” in hand sanitizers, masks, gloves - it was crazy expensive and so short in supplies that even pharmacies couldn’t get it from wholesellers - scalpers instead where making a killing . But you cannot just ramp up house production that fast.

onlyrealcuzzo 3y ago

Here's a fun thought experiment - ask yourself what happens if the Fed drops interest rates to -1000%, and home prices & equities go basically to infinity... Anyone who owned equities or houses before the interest rate move is set for life, anyone who didn't lost basically all of their savings. It's interesting how many people try to explain away this with Fed-speak and pretend it doesn't matter.

maxerickson 3y ago
Doesn't the value of $1 go to infinity also? What's the value of the thought experiment?
nabla9 3y ago
That would change only nominal valuation, not real values. Nobody becomes richer or poorer when nominal value of currency changes. btw. Central banks interest rate can go negative only little until it becomes cheaper to hold money assets or transfer them to other assets. Nobody holds cash if interest rate is -5%. This is why deflationary spiral can't be countered with just going below zero.

sokoloff 3y ago

Rents and owner-equivalent-rent are included in CPI calculations as the cost of shelter. https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-and-rent.htm#:~:text=Owners'%20equivalent%20rent%20of%20residences,which%20CPI%20data%20are%20published https://www.bls.gov/cpi/factsheets/owners-equivalent-rent-an....

nabla9 3y ago
As I wrote. That is an attempt to capture the cost of renting, not buying a house.

HWR_14 3y ago

That's not true. Inflation measures for homeowners don't take into account maintenance, they use what the fair-market rent of your house would be.