Economists of the Austrian School understand that monetary expansion has the effect of making things more expensive than they otherwise would have been. At the root of the real-estate bubble was Federal Reserve monetary expansion funneled into the purchase of mortgages by Fannie Mae, Freddie Mac, and the Community Reinvestment Act.
An important question is: Why wasn't the bubble in real estate reflected in the CPI?
The answer is that the component of the CPI that included the price of houses was replaced by "owners' equivalent rent." Google that and near the top of the list is the following link:
http://www.bls.gov/cpi/cpifacnewrent.pdf
It includes a section purportedly addressing frequently asked questions:
"Why doesn’t the CPI include the cost of buying and financing houses as well as property taxes and home maintenance and improvement?
"Houses and other residential structures are not consumption items and, therefore, should not be CPI items. All buildings and structures are capital goods, which are items that provide a service. In the case of houses and other residential structures, that service is shelter."
By this reasoning, what isn't a capital good?
A washing machine, for example, provides a service: clean clothes. Is it not, by the above reasoning, a capital good? What is the difference between a washing machine and house such that the price of the former should be included in the CPI and the latter shouldn't?
The answer, we are told, is that "Buildings and structures are also investment items, things that are bought and resold in organized markets with a potential for gain. House prices frequently appreciate; in this respect they differ from consumer durables such as vehicles."
But why would houses appreciate in value as an investment if not for its potential service as 'shelter'? Why are washing machines not perceived of as a similar investment?
One can't help but come to suspect that the CPI excludes houses and not washing machines exactly because the price of the former tends to rise more than the price of the latter, and that the true function of the CPI is to obscure the effects of monetary inflation.
Economists of the Austrian School also understand that when money is created, it isn't dropped from helicopters. The effects of monetary inflation are not uniform. Who gets to spend the freshly-created money and what they spend it on determines which prices will rise first.
Never mind the myriad other ways the CPI is manipulated downwards, implicit in the very notion of the CPI is that what matters is what people are paying for things irrespective of what they would have been paying for things absent monetary expansion. Monetary expansion is a transfer of wealth from the economy as a whole to whoever gets to spend the freshly-printed money first. The true purpose of the CPI is to obscure this fundamental fact.
If you think the CPI is a fabrication then you would be correct. The US Government computes the CPI, the US Government is the world largest borrower, if the CPI goes up then the FED MUST raise interest rates causing the US Government to pay higher borrowing costs. So the US GOvernment has an enormous incentive to have the CPI be as low as possible and big suprise it is.
Yes, Peter Schiff has an interesting section on this in Crash Proof 2.0. GDP and CPI collectively are every professional liar's dream come true. Even if their logic is correct for using owner's equivalent rent rather than house prices, it doesn't alter the fact that CPI didn't capture these increases and is therefore less than useful in gauging the degree to which a currency is being worn away.
When deflating GDP to account for inflation CPI is obviously the deflator used, so this pushes up GDP beyond what it otherwise would be if inflation were measured in real terms. That is aside from all the other defects GDP has.
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