Nimrod103 wrote:dealtn wrote:Nimrod103 wrote:
What I meant was that the cost of servicing the debt should be excluded from the inflation figure, but the original cost of the house should be included.
Then you would have a severely distorted, and under reporting of inflation, as in rising markets the original cost of a house would be below market rates (as would rents, imputed or otherwise). How would that inaccuracy help in policy targeting?
I'm not sure I follow why inflation would be under-reported.
The average (real) cost of a house in 1996 was £110,000. By 2005 it was £270,000. In money of the day terms, that rise would have been much bigger. Yet, that rise was inflationary, yet was completely ignored in CPI/RPI because it was outside the BoE remit.
I am arguing that if you wanted an inflation measure that included "the original cost of a house", and by definition that doesn't rise, yet other prices are rising, then by definition that price index would lag the one that included all things that were rising. I can't see the merit in such an index.
Now RPI (and CPI that ignores housing) also has this issue, although they are price inflation indices, not asset inflation indices. A better (price) inflation index, and one that includes the price of housing provision (and not purchase) would look similar to CPIH - and would also reflect substitution effects that recognises as some prices rise, and take up a disproportionate amount of the "basket", which many claim housing does, the macroeconomic effect of this on the reducing available spend on other constituents in the basket is captured.
The BoE remit is incidental to the accuracy of the macreconomic measurement of inflation, which is what my responses have focussed on.
Now if that inaccuracy of alignment between the measurement, and the remit attached to this inaccurate index also leads to secondary effects (or feedback) where policy response is sub-optimal that too can be a criticism (and one I am not averse to making). The 2 most prominent being, firstly, CPI (and RPI before) don't include housing, which is a core element of spend in society, and secondly, asset price inflation (including but not limited to housing) also have macroeconomic consequneces, and should be subject to a remit, and policy response too. For many the wealth effect of asset price changes are a key component of changes in demand (and supply) in the underlying economy, and thus should be taken into account in monetary (and possibly fiscal) economic policy.