Does the central bank in the country you have chosen include house prices (or equivalent) in the measure of inflation which underpins their inflation-targeting regime? If not, then what is their justification?

House Prices, Inflation, and Central Bank Policy (2000–2012)

This assignment asks students to investigate the role of house prices in relation to economic recessions and central bank policy. The main aim is to understand whether a sharp rise in house prices occurred before the most recent recession and how central banks responded to such changes.

Students must first examine whether a housing market boom took place prior to the latest economic downturn, such as the global financial crisis of 2008. The task involves analysing housing price trends to see if they acted as an early warning sign.

Next, the assignment requires students to explore whether the central bank of their chosen country includes house prices in the official inflation measure used for inflation targeting. If house prices are excluded, students must identify the central bank’s reasoning behind this decision.

The third part of the task involves critically evaluating whether including or excluding house prices has affected the central bank’s ability to meet its objectives—such as maintaining price stability and supporting the broader economy.

Finally, students are expected to gather monthly data on policy interest rates and mortgage rates between the years 2000 and 2012, using official central bank sources. This data should be used to create graphs comparing the two rates, and to calculate the banking mark-up (the difference between mortgage rates and policy rates). Students must then comment on how this mark-up changes over time and explain the possible reasons behind these changes.

The assignment combines economic analysis, data interpretation, and critical thinking, helping students to connect real-world financial trends with central banking decisions.

Did a house price boom proceed the most recent recession?
Does the central bank in the country you have chosen include house prices (or equivalent) in the measure of inflation which underpins their inflation-targeting regime? If not, then what is their justification?
Does the data you have collected suggest their choice (of whether to include house prices or not) has impacted their ability to fulfill their mandate (i.e. keep the economy at target)?
Using central bank websites to collect data on monthly policy rates and mortgage rates between 2000 and 2012, plot the data on graphs, and comment on the banking mark-up: does it change over time? How? Why?

Sample Answer

Did a House Price Boom Precede the Most Recent Recession?

Yes, in the United Kingdom, a major house price boom occurred before the 2008 financial crisis and recession. From the early 2000s until 2007, UK house prices rose rapidly, fuelled by easy access to credit, low interest rates, and strong demand. By mid-2007, the average house price had more than doubled compared to 2000 levels. This housing boom created an unsustainable bubble, which began to burst in 2008, contributing to a deep recession.

Does the Bank of England Include House Prices in Its Inflation Measure?

No, the Bank of England does not directly include house prices in the main measure of inflation it uses to set interest rates, which is the Consumer Prices Index (CPI). The CPI focuses on the cost of goods and services, including rents, but not the cost of buying houses.

Justification for Not Including House Prices

The Bank of England and the Office for National Statistics (ONS) argue that house prices are more like investments than consumer goods. Because homes are bought infrequently and their prices are affected by interest rates and credit conditions, they are not seen as suitable for inclusion in a consumer-focused inflation index.

Instead, the ONS introduced a newer index called CPIH, which does include owner-occupiers’ housing costs (like imputed rent), but CPIH is not yet the official inflation target of the Bank of England. The official target remains CPI at 2%.

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