CPI, inflation and the elephant in the room

The Straits Times, Published on Feb 13, 2012
HOUSING COSTS
CPI, inflation and the elephant in the room
THE Ministry of Trade and Industry's reply ('Consumer price index: MTI rebuts ST commentary'; last Thursday) to Mr Aaron Low's commentary ('The dollars and sense of inflation'; Feb 1) prompts an important broader debate about how to measure 'real' inflation in Singapore.

The heart of the debate revolves around whether housing costs, easily the largest component, should be included or excluded from 'core' inflation measures in Singapore.
Until 2009, the main 'exclusion' case for housing centred on measurement issues. Since then, the imputed rental measure has become more timely and accurate, and the original case for excluding housing has disappeared.
Out of the blue, another reason appeared - hitherto never used to justify exclusion, despite existing in the pre-2009 environment. The new mantra became: As nobody rents, 'imputed rent' is not really relevant to the cost of living for Singaporeans.
Nothing could be further from the truth.
Imputed rent is designed as a 'proxy' variable for housing costs. Technically, it gets around statistical issues to do with 'stock' versus 'flow' variables, and problems in differentiating consumption from investment in the housing market.
However, let us be clear. It is basically a shadow price designed to capture the impact of housing inflation on the cost of living.
And housing inflation is about as 'core' to the domestic inflation process as you can get in Singapore, both from a cost-push and demand-pull perspective.
No other developed country excludes housing from the 'core', unless there is a measurement issue.
In fact, the relatively more dominant role that housing plays in every Singaporean's personal balance sheet just adds to the case for inclusion.
Just look at the relationship between mortgage growth and consumer price index (CPI) inflation. Pretending otherwise is pure sophistry.
Adam Le Mesurier
http://www.straitstimes.com/STForum/Story/STIStory_765951.html

This post was responded to in the ST by:
15Feb2012: Excluding housing cost distorts capturing actual inflation rate
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