For some years I have been wondering why we see an annual property inflation rate of around 20% but does not reflect in headline inflation. When headline inflation was running between 4% and 6%, property inflation was outstripping all other categories by between 10% and 15%. But over the last 6 months, we have all too clearly seen what happens when inflated assets start deflating.

What should have been apparent five years ago was hidden in a myriad of statistics and the lack of home ownership by the majority of the population, both here and in many other economies.
I am arguing that the inflation we now see manifest in the average consumer basket has always been there, or at least since end of 2001, and that it was craftily hidden by the theoretical assumptions we adopt when we design the content and weight of the phantom consumer basket.
Secondly, I am suspecting that the hidden inflation in the property market was the result of the incorrect allocation of resources, and we now have a severe correction. Capital exiting property and pushing up prices in other sectors notably fuel, gold, other commodities, and food. In other words, the reasons for the high property inflation have not disappeared, they have simply re-allocated themselves, and because the items where they pop up now, are used and utilised by many more people, they have a direct bearing on the items with the heaviest weighting in our consumer basket, hence they now get measured properly.
Let me try and explain this complicated web of inflation variables in a simpler manner.
Since about the end of 2001, inflation, if it were to be measured for property only, would nearly have touched 20% per annum. But since only a relatively small minority of the population is homeowners, and since there are seventeen different categories in which we measure inflation, property inflation was hidden by the absence of broad-based home ownership. Its effect was only felt by people who wanted to buy a first-time property and by speculators who made a killing in property over a five-year period. The way we structure our statistics made inflation invisible.