Low-Balling Inflation Puts the Fed at Risk

The U.S. has an inflation problem. It has nothing to do with inflation being too high or too low. Unlike the raging inflation of the 1970s, it doesn’t need to be solved with a lengthy and painful recession. Instead, it is a problem of measurement because the cost of housing -- the single biggest expense for many Americans -- isn’t explicitly included in the inflation data.

A simple retort is that housing is included in inflation figures by way of what the Bureau of Labor Statistics -- the entity that compiles inflation data -- calls owner’s equivalent rent. Instead of using actual home prices in its calculations, the BLS estimates how much a homeowner would theoretically pay to rent their own home, abstracting housing prices from rental costs. This might not seem like much of an issue. After all, housing is included in the calculation, however imperfectly.