This is a great article discussing the effects that tinkering with the CPI and economic indicators in order to give a positive economic outlook have on markets over the long term:
“In 1983 the Bureau of Labor Statistics was faced with an awkward dilemma. If it continued to include the cost of housing in the Consumer Price Index, the CPI would reflect an inflation rate of 15 percent, thereby making the country’s economy look like a banana republic. Worse, since investors and bond traders have historically demanded a 2 percent real return after inflation, that would mean that bond and money market yields could climb as high as 17 percent.
The BLS solution was as simple as it was shocking: Exclude the cost of housing as a component in the CPI, and substitute a so-called “Owner Equivalent Rent” component based on what a homeowner might rent his house for.”
Click here to read the whole article in the Rocky Mountain News.
I will be exploring the changes to the CPI and how they have falsely depressed interest rates which helped lead to the crisis over the next several weeks. Stay tuned!
