Rent vs CPI

We previously discussed how housing lowers CPI a few weeks ago. The Sunday NYT has an article which traces the history of the shift away from home prices and mortgages and towards rent:

"Until 1983, the bureau measured housing inflation by looking at what it cost to buy and own homes, considering factors like house prices, mortgage interest costs and property taxes. But given the shifts in interest rates and housing prices, those measures could show big bounces from month to month. Besides, homes are a strange hybrid of a consumable good and a long-term investment. As part of a long-running evaluation, the bureau wanted to "separate out the investment component from the consumption component" of the housing market, said Patrick C. Jackman, an economist at the bureau."

The article included the chart below, which is quite revealing of the divergence between home prices  and rents. Imagine what CPI would look like if it accurately measured the actual inflationary factors impacting consumers’ pocketbooks.   

click for larger graphic


Chart courtesy of NYT


How does BLS determine this artificial measure? Via the Consumer Expenditure Survey:

"For the past 22 years, it has measured inflation in the cost of housing
in a rather indirect way. As part of its Consumer Expenditure Survey,
the bureau collects information from thousands of Americans about how
much they pay for rent. But because renters are only a small part of
the population, it also tries to measure how much homeowners are
essentially paying themselves in rent. To determine the so-called
owners’ equivalent rent, it asks homeowners how much they would have to
pay to rent the house in which they live. That figure constitutes about
23.2 percent of the Consumer Price Index, by far its largest component.
Food is 14.3 percent and transportation is 17.4 percent, for example."

Consider the governmental obligations that are tied to CPI:  everything from COLAs to Social Security to Veterans Benefits. It shouldn’t be a surprise that its structural bias is towards under-estimation.

How Home Prices Can Be Hot but Inflation Cool
NYT, June 26, 2005

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  1. The Nattering Naybob commented on Jun 28


    You have touched on a sore spot for me. The CPI fraud deserves more attention and thank you for addressing it.

    In the “Meet the New Boss” missives I beat up the CPI pretty well. In Part II the housing component was defrocked.

    The CPI uses imputed rent, but to add further distortion, the SFR boom has led to a glut of rental vacancies and a drop in rental rates.

    In addition I do believe the total unweighted housing component of CPI is at 41%. The homeowners imputed rent component unweighted is 23%.

    At 41%, the housing component distortion is immense and can be witnessed by using the cost of living calculator.

    In the “It’s Getting Better?” Series we used the CPI calculator to compute that from 1997 to 2003 the number of low and middle income working families paying more than 50% of their income for housing has increased 76%.

    To make matters worse using the CPI calculator, during the period 1965 to 2005, the housing price to wage ratio increased from 1.5 to 1 in 1965, to 12.5 to 1 in 2005.

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