Inflation Rates Are Very Different When Housing Rents Are Accurately Measured

One of the largest components of official price indexes is housing services, which account for 16 percent to 41 percent of major price indexes in the United States (e.g., Consumer Price Index). This paper demonstrates that the current measure of housing rents does not accurately track the actual inflation rate of housing rents. We construct an alternative quality-adjusted measure of housing rents that is based on a monthly statistic of landlord net rental income. Compared with our modified inflation rate, the official rate was overestimated by 1.4 percent to 3.4 percent annually during the Great Recession but underestimated by 0.3 percent to 0.7 percent annually during the current expansionary period after the recession. We further demonstrate significant impacts of our improved measurement of inflation rates on the cost of living adjustment to Social Security and real gross domestic product. These impacts persist for a long term because the modified price indexes are integrated of order one whereas the official indexes are trend stationary.