you can't hit what you can't see
I am heading to Mungotown to talk about monetary policy. I was researching the question of whether the Fed should target asset bubbles (and by target I mean, prevent / deflate!!). Chairman Ben's point of view is that the Fed should do so only to the extent that the bubble bleeds into overall inflation.
At this point something burbled up in my reptile brain; "housing is about 1/3 of the CPI, how could it have soared so far without bringing inflation along?"
People you probably know this already, but in 1983, the BLS redefined how to measure housing costs to "owner equivalent rent", and this variable didn't much move with housing prices in the last decade.
Here's a graph, courtesy of Dr. Housing Bubble (clic the pic for a more glorious image):
The red line shows the growth rate in the Case-Shiller housing price index, the blue line shows the growth rate of housing component of the CPI.
From 1998 to 2006, there was a complete disconnect between housing prices (rising like crazy) and the BLS measure of owner equivalent rent (which never went up more that 4% in any of those years).
Hard for a bubble to bleed into inflation when it's been defined out of the index!