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The CPI for rents: a case of understated inflation

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Author Info

  • Theodore M. Crone
  • Leonard I. Nakamura
  • Richard Voith

Abstract

Until the end of 1977, the method used in the U.S. consumer price index (CPI) to measure rent inflation tended to omit rent increases when units had a change of tenants or were vacant. Since such units typically had more rapid increases in rents than average units, this response bias biased inflation estimates downward. Beginning in 1978, the Bureau of Labor Statistics (BLS) implemented a series of methodological changes that reduced response bias but substantial bias remained until 1985. We set up a model of response bias, parameterize it, and test it using a BLS microdata set for rents. We conclude that from 1940 to 1985 the CPI inflation rate for rent most likely was understated by 1.4 percentage points annually in U.S. data. We construct an improved rental inflation series for 1940 to 2000; at the starting point in 1940, the revised index is 54 percent as large as the official CPI.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 04-17.

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Date of creation: 2004
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Handle: RePEc:fip:fedpwp:04-17

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Keywords: Consumer price indexes ; Rent ; Inflation (Finance);

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References

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  1. David Genesove, 2003. "The Nominal Rigidity of Apartment Rents," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 844-853, November.
  2. Joshua Gallin, 2004. "The long-run relationship between house prices and rents," Finance and Economics Discussion Series 2004-50, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Rondinelli, Concetta & Veronese, Giovanni, 2011. "Housing rent dynamics in Italy," Economic Modelling, Elsevier, vol. 28(1-2), pages 540-548, January.
  2. Thesia I. Garner & Randal Verbrugge, 2007. "Puzzling Divergence of U.S. Rents and User Costs, 1980-2004: Summary and Extensions," Working Papers 409, U.S. Bureau of Labor Statistics.
  3. Theodore M. Crone & Leonard I. Nakamura & Richard P. Voith, 2004. "Hedonic estimates of the cost of housing services: rental and owner-occupied units," Working Papers 04-22, Federal Reserve Bank of Philadelphia.

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