You hear a lot of economic statistics that come in with the proviso that they are adjusted for inflation. What exactly does that mean, and if you take out inflation, are we really in a housing bubble?

Definitions differ as to whether inflation is a cause or an effect, but two elements are always present -- consumer goods cost more and currency is devalued.

The result is a "persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services," as defined by Webster.

According to the calculations by Inflationdata.com, inflation has averaged about 3.49 percent annually since 1914. That means it is significantly higher some years, and lower other years. From 2000 to 2004, inflation has been a full percentage point lower than the norm, about 2.5 percent on average.

In 2005, inflation picked up but only slightly for the year -- 3.4 percent on consumer goods, compared to a rate of 3.3 percent in 2004, which puts 2005 closer to the 3.5 annual average.

When inflation goes up, so does the cost of money, as the Federal Reserve raises short-term interest rates to cool inflation down. Since banks loan money in order to make a profit, long-term rates typically rise, too.

In relating inflation to housing data, it's interesting to note that housing prices have risen steadily every year since the National Association of Realtors began keeping track back in the mid-1960s. In 2005, housing rose four percent.

During the 12 month period ended in December, the indexes for lodging away from home, for rent, and for owners' equivalent rent, rose 3.5, 3.1, and 2.5 percent, respectively, indicating that housing is still ahead of inflation for the time being, but not by much.

Published: January 31, 2006

Use of this article without permission is a violation of federal copyright laws.

Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.