Real Interest Rates Soar as Case Shiller CPI Crashes to Minus 5%

By: Mike_Shedlock

The following chart shows the effect if one substitutes the Case-Shiller housing index for Owners' Equivalent Rent in the CPI.

Case-Shiller-CPI (CS-CPI) vs. CPI-U

The above chart is courtesy of my friend "TC" who writes:

For Dec 2008 the CS-CPI fell to a stunning negative 5.0% year-over-year as compared to a positive 0.1% for the CPI-U. Moreover, the Government OER data continues to move higher while home prices continue to move lower amplifying the divergence between the two CPIs to its largest level ever. The CS-CPI now reflects a price level last seen in Dec 2006.

What is equally amazing is that it was less than 2 1/2 years ago (Sep 2005) when the CS-CPI was positive 7.8% year-over-year and we're now 1280 basis points lower. Deflation is here and it's now even beginning to show in the government's CPI-U data. "

Owners' Equivalent Rent " (OER) is the largest component in the government measure of the Consumer Price Index (CPI).

OER is a process in which the BEA estimates what it would cost if owners were to rent the homes they own from themselves. OER is not a valid pricing barometer.

By ignoring housing prices, CPI massively understated inflation for years. The CPI is massively overstating inflation now.

Data for the above chart is from two sources.

• Case Shiller January 2009 Release
  
• December 2008 CPI report. See CPI at .1% Annually, Smallest Increase Since 1954 for details.

For more on the methodology behind this post please see the discussion following CS-CPI Negative 3.1% Year over Year in November .

Real interest are very high even at zero percent!

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

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