IT IS AN odd thing about deflation that the one component of the consumer price index (CPI) exerting the greatest downward pull on it is one that many people think is rising too fast in price.
Yes, strange as it may seem, it is property that has kept us in deflation, according to the official statistics. They say that the property component of the CPI still showed a year-on-year rate of decline of 7.5 per cent in March, weighing down the entire index.
The first chart shows you the story. The red line represents inflation in overall consumer prices and the blue line is what you would get if you took the property component out of the figures. Instead of a price decline that accelerated to 2.1 per cent in March, we would have been in positive territory since the beginning of the year.
Scratch your head indeed. How is this possible when the property market has staged a roaring recovery that already has people talking of overheating and a property bubble?
The difficulty lies in how inflation in the property market is measured for the CPI. Curiously, no account is taken of property prices in these figures. They measure only public and private housing rents plus some incidentals such as rates, maintenance and management fees.
Think about the difficulties here. You may take the view that this is a price index and therefore it ought to measure property prices but home purchases do not constitute part of your monthly shopping basket. It is possible that you buy property only once in your life. Many people never do at all.
If you own a home and are still paying off a mortgage, your property cost is your monthly mortgage payment. If that monthly payment is a fixed one, then the housing component of your personal shopping basket does not change at all from month to month, irrespective of what may happen to property prices.
