April 20, 2014

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

September 12, 2012 - Philippe Bergevin

The Bank of Canada needs a better inflation indicator that is more sensitive to swings in house prices than the Consumer Price Index (CPI), according to a new report from the C.D. Howe Institute. In “Housing Bubbles and the Consumer Price Index: A Proposal for a Better Inflation Indicator,” Philippe Bergevin points out 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,” notes Bergevin. The main concern, he adds, 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.

For the report go to: http://www.cdhowe.org/pdf/Commentary_362.pdf

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