Economic Report of the President

crop damage became evident. Prices received for the major crops increased20 to 30 percent during the second half of 1980.Housing. The home purchase, finance, insurance, and taxes componentof the CPI is a matter of controversy. Ideally, a cost-of-livingindex should reflect the cost of shelter services provided by owneroccupiedhouses. For rented houses, this is precisely what is capturedby market rents. Under current practice, however, the home purchaseand finance component of the CPI in effect treats the purchase of ahouse as it would any ordinary good. But houses do not only provideshelter; they are also assets which yield a return. As a consequence,the movement of house prices reflects not only the cost of shelter butalso the value of the investment. Since the CPI also assumes that partof the mortgage used to finance a house is "purchased," the confoundingof consumption and investment considerations is exacerbatedby the treatment of mortgage interest costs. The Bureau of LaborStatistics (BLS) has been concerned for some time with the adequacyof the homeownership component of the CPI. BLS, in fact, currentlypublishes several experimental indexes based on alternative treatmentsof homeownership.For the present, at least, the CPI tends to overstate the importanceof home purchase and finance and, given the volatility of mortgagerates, to produce startling monthly variations in the CPL During thefirst 6 months of 1980 the home purchase and finance component ofthe CPI increased at a 27.6 percent rate, adding about 3 percentagepoints to the annual rate of inflation over the period. In July andAugust the fall in mortgage rates dominated the index. The homepurchase and finance component fell at an annual rate of over 25percent in July, and this decline was large enough to offset the increasein the other components of the index, resulting in an unchangedCPI from June to July. While this zero change in prices waswidely regarded as a statistical anomaly, it was no more or lessanomalous than the inflationary influence that the home purchaseand finance component had imparted to the CPI throughout the firsthalf of the year. This influence began to be felt again during the latefall and early winter as mortgage rates climbed to near their springpeaks. The home purchase and finance component promises to havea heavy impact on the CPI in the early months of 1981.WAGES, PRODUCTIVITY, AND INCOME SHARESAs discussed in Chapter 1, the primary goal of anti-inflation policyduring 1980 was to prevent the increase in oil prices from becominga stimulus to higher wage settlements. The policy was motivated bythe facts that the long-term behavior of prices of goods and servicesclosely reflects the behavior of business costs and that wages, salaries,and fringe benefits account for roughly two-thirds of the total152