Mismeasuring inflation fuels the housing crisis: interview with Kareem Kudus
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Episode 9: How mismeasuring inflation fuels the housing crisis: interview with Kareem Kudus

August 4, 2022

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Umair (00:05):

My name is Umair.

Megan (00:07):

And I'm Megan.

Umair (00:08):

And we're here bringing you another episode of Generation Squeeze’s Hard Truths podcast. Who are we talking to today Megan?

Megan (00:18):

Kareem Kudus, who's a stellar volunteer for Gen Squeeze and writes for our blog about inflation.

Umair (00:25):

And we're going to actually let Kareem tell us a little bit about himself. There he is. Hi Kareem.

Kareem (00:31):

Hey, thanks for having me on today.

Umair (00:33):

Hey, thanks for coming on. So yeah, to start with, we were wondering if you could tell us a little bit about yourself, about your professional background and your association with Gen Squeeze.

Kareem (00:45):

Yeah, sure. So my professional background I'll start with, I guess I graduated back in 2015 from my master's degree and I started working in finance. I did that for about five or six years and for most of that time, I was pretty unhappy. I really didn't like working in finance. I found the work pretty soul sucking, doing things just for the sake of money and nothing more. So last year I decided to go back to school. Now I'm at U of T and I'm doing a PhD. My research revolves around artificial intelligence and its applications to medicine. Now for Generation Squeeze, I got involved probably almost a year ago now, and at the time COVID was much more serious. We were in lockdown still. And I had been doing a lot of reading on economics, financial policy, things like that. And I realized there's some big problems out there and I wanted to do something to solve them or help to solve them, at least. So I went searching for organizations that were doing work in this area whose views aligned with mine. And the one, the only one I came upon in Canada was Generation Squeeze. So that's how I decided to join the efforts of Generation Squeeze to try and make a difference.

Megan (02:07):

Woohoo. All right. So one of the things you've done for Gen Squeeze has been writing about inflation for our blog. And you've pointed out that while we've only recently started talking about inflation a lot, the issue of rapid inflation is nothing new. There's one specific type of rapid inflation that's been underway for a long time inflation in the cost of housing, you make the case that the consumer price index, which is the measure we use to track inflation in Canada, doesn't properly account for housing costs. But leaving aside the issue of housing for a second, let's start by asking what is CPI? We see on the news that inflation rose to 8.1% in June. What does that mean?

Kareem (02:52):

Yeah, that's a great place to start when discussing this issue of whether CPI does a good job of measuring housing costs. So CPI is a pretty common measure of inflation that's used around the world. And it's important to make that distinction. To me, CPI is just one way of measuring inflation, being the loss of purchasing power over time. So how CPI does this is Statistics Canada, the agency that publishes CPI, has created a collection of things that people tend to spend money on. Spend money on this collection includes things like food, shelter, transportation, clothes, and they track the cost of each of these things over time. Every month now they combine these things, all of them into what economists like to call a basket of goods. So this basket is comprised of all these things in the collection, like food and transportation, and they track the total cost of that basket over time as well. Now, what inflation is according to CPI is the change in the total cost of this basket. So last year, the basket costs a certain amount. This year it costs 8.1% more. And that's what, that's where that number is coming from.

Umair (04:12):

In terms of what governments can do to respond to inflation, it seems like it's not really government so much, at least in, in the media, what we see is like it's central banks that respond to inflation and they do that by raising interest rates. Is that the only tool they have and how does, well, first of all, how does it work? And then like, are there other tools for managing inflation?

Kareem (04:35):

Yeah, so it is generally thought to be the central bank's job to manage inflation. However, the government also does play a role. The government spending can cause or help inflation based on how much they're spending, because that's added demand or reduced demand from the economy. But for central banks, the main thing that they do is raise and lower interest rates to impact inflation. Now, the mechanisms through which they do, this are quite complicated. It's probably not worth getting into those details, but basically they influence the markets by yeah, just changing interest rates.

Umair (05:22):

Okay. Let me know if this sounds stupid, but I thought it was the central banks lend to the, the private banks and they lend at a certain interest rate. And that's the interest rate that they increase or lower.

Kareem (05:34):

Yeah, exactly. And that's the main mechanism that they use, but what they're affecting when they do that, it's just the overnight interest rate is called now there's loads of different interest rates out there. There's a five year interest rate, a 10 year interest rate and all these other ones. So they have other mechanisms that are involved with those interest rates that are, are outside of what you described. But that is the main mechanism that they use to affect the market.

Umair (06:04):

And the long term interest rates that's for bond markets?

Kareem (06:08):

The long term interest rates.

Umair (06:09):

I don't, I don't know what a bond market is by the way. <Laugh>

Kareem (06:11):

Yeah, yeah, yeah, yeah. So what people tend to think about as a five year or 10 year interest rate is the yield on a government of Canada bond because a government of Canada bond is thought to be a risk free interest rate. So that's where that comes from.

Umair (06:31):

I see.

Megan (06:31):

Can I interject because I, I still just don't understand the connection between those interest rates and what I pay for bread?

Kareem (06:39):

Yeah. That's a big connection to make. So those interest rates or interest rates, generally, they act as kind of like a fuel lever for the economy. So the bank of Canada to help the economy, they move interest rates down. When the economy isn't doing well to make money, easier to borrow and to drive spending, which helps boost economic growth. Now the issue with keeping interest rates low for too long is that generally low interest rates tend to lead to inflation. So if money here is easier to borrow, there's more money floating around more money chasing after the same amount of goods or fewer goods results in inflation. So it's generally thought that keeping interest rates low for too long tends to drive prices up

Megan (07:30):

Well. And so then let me try to articulate my understanding. So the flip side of that is that when my bread costs too much, the central bank is responding by raising interest rates and just trying to slow down the economy.

Kareem (07:44):

Yeah, exactly. It's a very crude approach that we have to dealing with inflation. And it really hasn't been much of an issue for a while now because we haven't really had interest rates rise to deal with inflation in a long time.

Umair (07:58):

And then so really the main purpose is to slow down economic activity. And so as you kind of hinted at governments can do this too by way of the amount that they're spending, but then they could also raise taxes, right. To take money away from people. So they're not spending as much.

Kareem (08:16):

Yep. Those are two other ways that the government aside from the central bank could affect inflation.

Umair (08:22):

Right? So now that we have an understanding of what the CPI is, let's look at the issue of housing and how it's accounted for in Canada's inflation figures. You mentioned that the cost of housing or shelter is one of the components of the CPI. If that's the case, why hasn't the rapidly rising cost of housing, you know, in the past two decades, we could say, why hasn't that been accurately reflected in the CPI?

Kareem (08:50):

Yeah, that's a great question. So you're right. That shelter and housing are accounted for in CPI, but the way that shelter costs and housing costs are accounted for are probably not the way that you would expect. So they have two costs for shelter in there. They have a rental cost and they have an owned accommodation cost. So rental is what you would expect. It's the cost of rent owned accommodation, however, isn't tied to the price of home. So you would think owned accommodation is the cost of buying a home, but it's not. It's just the cost of owning a home for home owners. So it accounts for things like property taxes, interests on your mortgage upkeep of your house and repairs, but it doesn't actually cover the cost of acquiring a home. So while since 2005 home prices are up about 300% on average across the country, this owned accommodation component within CPI is only up 60%. So it's completely disassociated from reality.

Megan (10:03):

What? <laugh> How did we end up in this boat? That seems rather crazy.

Kareem (10:10):

Yeah, it is. It is completely crazy that the biggest expense that many people are facing the expense of acquiring a home isn't accounted for in our inflation measure. And I think this is kind of it's just happening for historical reasons. So back in the day, when CPI was used to measure inflation in the eighties, let's say buying a home wasn't that expensive things like food were really expensive. We were spending a lot of our income on that. Things like clothes and all of these things. So CPI was a much better measure of inflation back then when housing wasn't taking up a significant portion of our income, obviously now that's changed completely. And it just doesn't make any sense that we're using this measure as our main measure of inflation anymore.

Megan (10:58):

I don't wanna get too much in to the weeds, but I'm just really curious, especially considering the very vast differences in housing costs across the country. Like how do they even, do they take an average? How do they look at like even just rents? I mean, rents can be so drastically different. How do they come up with a…

Kareem (11:16):

Yeah, so they have all these different indices and they do surveys in different ways. So they'll sample from across the country. So they do try and account for this variability. And this is kind of, what's hard about coming up with one perfect inflation measure is as you're alluding to everyone is experiencing a different rate of inflation because everyone is buying different things like everyone is paying different rents and rents are rising by different amounts across the country. So it is just supposed to average all that out into one number, which is a hard thing to do.

Umair (11:50):

So let's say that the CPI was accurately accounting for the cost of housing. How high do you think it would be?

Kareem (12:00):

I think it would be somewhere between where it is right now at around 8% and where house prices have risen to over the last year or so. I think there are 20 something percent right now. So it really depends on how you were to weight things, how much of a, a weighting house prices would get in this optimal inflation measure, but it might be upwards of 10%. It might be even higher than that. And in the past, I think is more interesting. It would've been higher than we wanted for the last 10 years.

Umair (12:34):

Probably. Right, right. And so, I mean, we've been saying like, oh, we've have we have relatively low inflation. Like CPI has been, you know, hasn't really been a talking point and interest rates have been very low, you know, through the last decade after the 2008 financial crisis. And also of course the more recent COVID crisis. And we've been saying that, oh, inflation is low, but you're saying that, well, it's showing up as low because we're not taking housing into account properly. So what are the implications of an inaccurate inflation measure and, you know, how would it have been different if we had measured inflation properly?

Kareem (13:14):

Yeah. So there's a bunch of different implications. CPI seems like kind of this abstract thing, you know, it's just an economic indicator that like you said, no one has really been talking about until six months ago. No one really mentioned it for the last 10 years, but it has a wide range of policy implications, everything from the general public using it in wage negotiations to the government changing, fixed payments based on CPIs measurement of inflation. But I think the most important place for me at least is in monetary policy or the setting of interest rates. So back in, let's say 2015, when Toronto's housing market started skyrocketing and, and all across the country, if we had an inflation measure that picked this up interest rates would've probably started rising to deal with this inflation and that would've probably caused the housing market to stop rising at such a fast rate. And that's kind of what we're seeing happening now, right? Interest rates are going up and the housing market is cooling off. So if that were to have happened five or 10 years ago, instead of now, we wouldn't be in the situation where in now where housing has gotten so unaffordable.

Megan (14:31):

So you mentioned that back in the eighties, CPI made sense because housing wasn't as expensive is that part of the reason that Statistics Canada hasn't been accurately accounting for housing costs or are there other reasons?

Kareem (14:46):

So the main reason that they give for not including in housing in CPI, I think is a really bad one. They've mentioned this in the Globe and Mail last year, they did an AMA on Reddit recently. And what they're always saying is that housing can't be included in CPI because houses are assets, and CPI isn’t meant to track the price of assets. It's meant to track the price of consumable goods now. Okay. That's fair. If CPI has historically been constructed that way, where the issue is, is that we can't keep calling CPI inflation, if it isn't capable of accounting for home prices.

Megan (15:29):

That stings. So is, is that part of the problem? Why, why do they consider it an asset instead of a place to live?

Kareem (15:38):

Yeah, I do think that's a big part of the problem. Honestly. I think that's a big part of our problem generally with housing is that it's seen as an investment by a lot of people. I was looking at some numbers that were released recently and in Ontario, most of the new condos that were built over the last five years were bought by investors. So just generally, I'd say across our economy, thinking about housing as an asset is a big problem.

Megan (16:06):

And it's even baked into Statistics Canada then, like it's been institutionalized in ways that are pretty harmful.

Kareem (16:14):

Yeah. And even across in economics, generally, this is like a very entrenched belief. I was part of a conversation with a really famous economist from UBC the other day. And he was describing a hypothetical scenario where if the cost of condos went to a billion dollars and rents were controlled such that rents didn't rise that high, he would see no problem with inflation as measured by CPI being at around two to 3% still because housing and those condos aren't directly increasing the cost of our day to day living. Whereas obviously if you think about inflation as a loss of purchasing power, everyone that wanted to buy those condos that are now a billion dollars have lost almost all of their purchasing power.

Umair (17:05):

Okay. Just to go back for a second, just to ask you a bit more about the point you made about the fact that had we been measuring inflation properly in accounting for the cost of housing, we would've raised interest rates earlier much earlier. Okay. So let me try and make sense of this from the standpoint of the central banks and the government. I mean, if the rest of the economy is sluggish, then yeah. Then raising interest rates to cool down the cost of housing would affect the rest of the economy as well. Right. So are there are interest rates really the only tool there then are there, are there other things perhaps that could have been done

Kareem (17:44):

For the housing market? Not the economy.



Kareem (17:46):

Well, there's a few points here. One is that there's definitely other things that could have been done to prevent housing from getting so expensive. Interest rates are not the only is reason that we're in this situation. There's things like blind bidding that has driven pricing up there's things like supply issues. So if we were building more houses, but this interest rate and inflation measurement issue is certainly part of the problem. So I agree with you that there could have been collateral damage to the rest of the economy. If interest rates were raised just to deal with housing prices or inflation, but that is the job of the central bank. If inflation gets over 3%, they're supposed to bring it down. So we, that is the job of the central bank to not let inflation get too high. So they, they should have been doing that, whether it was helping or harming the economy.

Umair (18:41):

And I guess maybe we can say like, if our economic growth is so tied to rapidly rising housing prices maybe is raising interest rates to deal with that isn't such a bad thing.

Kareem (18:51):

Yeah. And if our economic growth is so tied to just debt in general, companies are just borrowing massively. That's part of why some of this economic growth has happened as well. So we shouldn't just be reliant on cheap debt to grow the economy as well.

Umair (19:06):

Okay. So what about solutions then? What is it that Generation Squeeze is advocating for here?

Kareem (19:13):

Yeah. So Generation Squeeze at a high level, I'll keep it simple. We're just advocating for a better measure of inflation. One that doesn't ignore the cost that prospective home buyers, young Canadians, future Canadians are facing by skyrocketing housing prices. So we're advocating Statistics Canada directly to deal with this. And that's the main route that we've gone about so far, the Bank of Canada is tasked with keeping inflation between one and 3%. And they've directly said that they use CPI as their measure of inflation. So we need some way of changing that and accounting for that because we can't keep setting monetary policy while ignoring home prices.

Megan (20:00):

So does that mean something other than CPI?

Kareem (20:04):

It could be a modified CPI that does actually take into account home prices, or it could be something else entirely, either one.

Megan (20:13):

Do you know if this has that happened in other places around the world? Are there countries that do a better job of this?

Kareem (20:20):

So we're kind of in an interesting position here in Canada, we have one of the most unaffordable housing markets in the world. So this is really one of the first places where our not including home values in our inflation measurement is a really big issue. There are a couple other comparable places that have come up with some interesting solutions. The one I like most is in New Zealand. So what they've done there is instead of trying to come up with the perfect inflation measure, instead of trying to balance everything out in this one index that is supposed to measure inflation perfectly, what they've done is ask their central bank to directly consider their impact on home values when making their monetary policy decisions. So if they're going to lower interest rates, they have to directly consider how that's going to affect home affordability and then decide whether or not this their decision is a good idea.

Megan (21:21):

So obviously if housing prices were better reflected in inflation, we'd have much higher interest rates. And the interest rates we have now are high enough that they're obviously painful for a lot of everyday people who do have to take out student loans or have variable rate mortgages. So how do we fix this problem without hurting the people that we want to help?

Kareem (21:44):

Yeah. That's a, it's a really tricky situation we're in right now because we've let things get so out of control that fixing it is definitely going to hurt some people. The problem is that we can't just not do anything because not doing anything is making the decision to harm all future Canadians, all younger Canadians and all future generations of Canadians by giving them these massive mortgages that they have to pay for the rest of their lives. So someone is going to get hurt. Unfortunately it's either the people who have overextended themselves now or everyone in the future.

Umair (22:25):

So you were part of the discussion that took place between Gen Squeeze and representatives from statistics, Canada. What was the outcome of that discussion?

Kareem (22:36):

So when we didn't meet Statistics Canada, they were saying things like, does this really matter? Most Canadians already own a home. Anyways. And through that meeting, we realized that they don't really have any incentive to change this. So what we're trying to do now is go another route, probably the political route, where we go to the MPd and we try and explain this issue to them. Hopefully this can put some political pressure on them to do something.

Megan (23:05):

Well. What do you think we haven't asked that you think is important for people to know or understand about this issue?

Kareem (23:11):


Megan (23:12):

Yeah. You.

Kareem (23:14):

One thing I thought of throughout the conversation that I wanted to put in somewhere but I couldn't find a place. I'll just tell you, because I think it's interesting is back when I was working in finance, this is like 2016, 2017. It was after the financial crisis, interest rates had been low around the world for a long time. And I remember everyone was always talking about the inflation puzzle. Everyone was trying to figure out how in the world is it that interest rates have been so long, these economies are chugging along well and inflation hasn't happened yet. Inflation hasn't risen. And there's all these theories going on about globalization, monopolies and corporate monopolies, all kinds of explanations. But I realized recently that it was just because where inflation was happening has changed. Now when people have extra disposable income, we're not buying more food. Most people already have enough food to eat. Most people already have enough clothes to where, where all this extra money is going is into the housing market in Canada because people saw it as a foolproof investment that they could use. So I just think it's funny that everyone was talking about this inflation puzzle for so long and it, we just weren't measuring inflation correctly. That's all there was happening there.

Megan (24:37):

So nobody, nobody figured that out. Huh?

Kareem (24:39):

Yeah. And I don't get it. It the economists, they're just obsessed with CPI for some reason.

Umair (24:45):

So we don't really have a, a task, like usually, you know, in, in one of these conversations you kind of end with like, whoa, what can listeners do with what, what we're talking about? Do you want to try answering that question, Kareem?

Megan (24:58):

Well, if it just sounds like we need some, some popular support of whatever alternative we come up with. Right?

Kareem (25:04):

Yeah. Or just people, people talking about this generally, you know, it's not a very exciting topic. Like it doesn't get people excited. Like I don't know, sick children or something. It just seems like this weird abstract.

Megan (25:21):

I'm so excited by sick children. I'm sorry.

Kareem (25:23):

You know, it's motivating my research is, is trying to help kids with cancer. Like that's motivating and it, people get excited when you talk about that. But when people hear about inflation measurement, like no one really cares, but unless we get some support and people want this changed, it's probably not going to change.

Umair (25:44):

Do you think we should campaign on this, like spearhead a, a campaign to get people interested in, you know, petitions and letters to MPs that sort of thing.

Kareem (25:54):

Yeah, definitely. I think it's a, a really crucial thing.

Umair (25:57):

Yeah. We just have to goes

Megan (25:59):


Umair (25:59):

To, sorry. Go on Megan.

Megan (26:01):

No, no, you go ahead. Conclude your thought.

Umair (26:02):

Well, just that. Yeah. I mean, I think doing it in a way that is accessible to people, which I think, you know, this discussion will hopefully contribute to that because I think you've been very helpful in being accessible. But yeah, I, I mean, if we are to kind of launch a campaign on this and get people interested in, in something seemingly quite technical but something, of course that has a huge impact on our lives. I mean, I think it could be a worthwhile endeavor, so yeah, I'd be interested to hear what listeners think too. I mean, you know, we are looking at a few different things to campaign on and really it makes sense to prioritize like, you know, maybe doing things at least for a set of months, like one at a time. So I'd, I'd be interested to hear what listeners think as well. But Megan, you, you were gonna say something.

Megan (26:52):

I was reflecting on the, the Sofa Session episode about democracy and trying to rejuvenate democracy. And, and I feel like this is somehow connected because we tend to avoid understanding things that seem too complicated. I mean, I certainly could have spent more time reading about this, but you know, I, I tend to gravitate towards other subjects because they're easier for me to understand. But there's some takeaway here of even when things are hard, when you realize just how important they are to understand so that you can grasp what needs to change, it's worth doing.

Umair (27:26):


Kareem (27:26):

<Affirmative> yeah. I agree with that completely. I think there's a lot of big kind of obscure issues like this that just define how we live, you know, like we can work hard all we want, but if we're not dealing with inflation properly hard work is not gonna get us anywhere. And there's all these policies that are driving how our economic system works and they're largely just ignored because they're obscure and not obvious and easy to grasp the effects, what they really make a difference in our lives.

Umair (28:04):

Okay. So that was great.

Megan (28:06):

Yeah. That was really incredible.

Umair (28:09):

Yeah. And I think, you know, for listeners who are more interested in this topic, like we'll link the blog posts, there was a series of them that Kareem wrote for the Gen Squeeze blog. So you can read and learn more about the topic and let us know what you think is this sort of thing. Is this helpful? I know it was helpful to me. Megan, how about you? What do you think?

Megan (28:31):

Yeah, I mean, I think I went into it knowing very little and now I feel like I know enough to be, to have something else, to be mad about <laugh> but I think that's it like stay tuned also because hopefully we can find a, a way to turn this into some sort of action.

Umair (28:48):

Yeah. And let us know what, what listeners, like what do you think? You know, how should we go about this? And you can do that by writing to info [at] gensqueeze [dot] or you can write directly to me at umair [at] gensqueeze [dot] ca. That's how you can reach us about this or any other topic. Otherwise. Thanks for listening. Please subscribe. If you haven't done so yet please share, rate and review the podcast and we'll see you soon.

Megan (29:20):

All right. Hope you'll tune in next time.


Mismeasuring inflation fuels the housing crisis: interview with Kareem Kudus
Mismeasuring inflation fuels the housing crisis: interview with Kareem Kudus
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