Huh? The CPI index measures the cost of goods and services. The increase in “implied rental” is the service associated with a house. Inflation measures aren’t supposed to track changes in asset prices (which are related to expectations about the future). Including asset price inflation would make the CPI a less useful statistic – at least for what we actually use it for.

“Hence investers are confused, thinking they are seeing skewed sector markets when in fact they are seeing one market constellation weaken and another strengthen”

I suppose the question would be here – what market is not becoming relatively more productive?

“The lack of credit has sharply reduced potential output in the global economy. The trend output must be lower. Companies are struggling to get credit for simple things like Letters of Credit. I do not have statistics to hand but that must have an impact.”

Completely agree – this is how I have felt for a while. Although some recent data seems to indicate that, for New Zealand at least, a growing output gap is becoming important.

In hindsight what has happened will be obvious – but without real time data things are a pain!!

in better news http://ftalphaville.ft.com/blog/2009/01/12/51016/are-things-really-that-bad-in-china/

It could be the case that a much more efficient set of market structures are emerging, but barely distinguishable by the banks. Hence investers are confused, thinking they are seeing skewed sector markets when in fact they are seeing one market constellation weaken and another strengthen.

In this case, the total perceived volatility would be greater than the separate volatilities of each equilibria alone, and the whole market structure would be underpriced.