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Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator

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  • Philippe Bergevin

    (C.D. Howe Institute)

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    Abstract

    The Bank of Canada needs a better inflation indicator that is more sensitive to swings in house prices than the Consumer Price Index (CPI). The author points out that the CPI has not usefully reflected the rapid run-up in housing prices in recent years. He proposes a new official inflation indicator for monetary policy purposes that would better reflect the prices of houses sold in the market. The use of assumed prices for dwellings rather than actual prices for houses and the inclusion of a mortgage interest component make the CPI less sensitive than otherwise to housing price changes. The main concern is that the CPI's insensitivity to housing could potentially cause the central bank - reassured by its imperfect indicator that inflation is under control - to keep rates too low for too long.

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    File URL: http://www.cdhowe.org/pdf/Commentary_362.pdf
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    Bibliographic Info

    Article provided by C.D. Howe Institute in its journal C.D. Howe Institute Commentary.

    Volume (Year): (2012)
    Issue (Month): 362 (September)
    Pages:

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    Handle: RePEc:cdh:commen:362

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    Related research

    Keywords: Financial Services; Monetary Policy; Canada; housing prices; Bank of Canada; Consumer Price Index (CPI);

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    1. Diewert, Erwin & Nakamura, Alice O., 2009. "Accounting for Housing in a CPI," Economics working papers erwin_diewert-2009-19, Vancouver School of Economics, revised 12 Mar 2009.
    2. David Laidler & Robin Banerjee, 2008. "Unstable Foundations: Assets Markets, Inflation Targets, and Canada's 2011 Policy Choices," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 278, December.
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