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

Author

Listed:
  • Philippe Bergevin

    (C.D. Howe Institute)

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.

Suggested Citation

  • Philippe Bergevin, 2012. "Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 362, September.
  • Handle: RePEc:cdh:commen:362
    as

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    File URL: https://www.cdhowe.org/public-policy-research/housing-bubbles-and-consumer-price-index-proposal-better-inflation-indicator
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    References listed on IDEAS

    as
    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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

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

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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