Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator
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.
Volume (Year): (2012)
Issue (Month): 362 (September)
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- W. Erwin Diewert & Alice O. Nakamura, 2009. "Accounting for housing in a CPI," Working Papers 09-4, Federal Reserve Bank of Philadelphia.
- 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. Full references (including those not matched with items on IDEAS)
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