Housing's rapid rise skews inflation data.(Brief Article)

KiplingerForecasts, July, 2005

One more reason the Federal Reserve is antsy about inflation: It's greater than reported. The way housing costs are figured understates changes in the Consumer Price Index (CPI), perhaps by as much as a half a percentage point. That means prices in May actually rose by about 3.3% on an annualized basis, rather than the tame 2.8% indicated by the CPI. And overall prices in 2005 will really climb about 3.5%, rather than the 3% expected for the CPI.

Blame it on the housing boom. Since 1983, the CPI has used "owner-equivalent rent"--the amount a house would fetch on the rental market--as a substitute for homeowners' lodging costs. That strips out the investment component of owning a home. Until a few years ago, it worked well. But then house prices soared and rents...