This inflation measure never took account of property prices. It takes into account the level of mortgage repayment. If interest rates go up and property prices remain the same (all other factors also remaining the same) then inflation will go up. As house prices fall the mortgages and hence mortgage repayments will fall which will reduce inflation.
True - but what do you think of the ‘forward punting’ of the resulting inflation?
For the super-simplified example of house prices doubling in one year, with prices flat before / after, you don’t get a massive jump in inflation for one year, you get a slight increase in inflation for 20 years.
Surely any future inflation which is known about today is really today’s inflation?
Come on geckko, you are the expert! I tried to lure you into responding a couple of times over the past year on this topic. A London policeman once said to me as a young green Irish Paddy when I asked him, where to go for a leak in Tralfalgar Square, I quietly stuttered as what to call the place, Jacks, Johns, loo, toilet "speak up there, and don’t be bashful"!
Measures of general price levels are important for economic management purposes. How can you target inflation (which is the rate of increase in the general price level) without a good measure.
However, in practice it is impossible to get an ideal solution. CLearly housing costs need to be included in some way. Rents are (by comparison) easily measured compared with costs of ownership which naturally include a substantial finance element.
Nothing used that I have seen is ideal and has its flaws. There seems to be an approach followed in most countries that is better than some alternatives (though I confess I haven’t trawled over the Irish technical details).
I have been reading back some of the comments and there remains some misunderstanding by posters here.
A couple of things to note:
The CPI is a measure of general price levels (or changes as the CSO put it), and NOT the cost of living.
To understand what that means consider this. If house prices halved tomorrow the cost of living would go down, but the general price level would not. By that I mean that at the margin the cost of financing a house would go down substantially (the cost of living), but the general price level of financing a house would not (i.e. there is a large stock of people locked into paying a higher price.)
I don’t know why people are getting their knickers all twisted over this.
True - but it’s hard to avoid the idea that the current system encourages economic cycles. If the inflation measures quickly reacted to rising house prices, it would act as a better sign of an economy running beyond its potential, and thus call for earlier counter-cyclical action (the fact that house price rises themselves act as a cyclical mechanism reenforces this need).
The current CPI approach averages house prices over such a long period that it provides almost no information, since the 20 year averaging is considerably longer than the economic cycle, and thus the housing contribution to CPI is near constant.