![]() In the meantime, we will consider all the recommendations of this distinguished group as we plan future improvements to the CPI. I will say more about the report from the Committee on National Statistics soon. The committee recently published their report, “ Modernizing the Consumer Price Index for the 21st Century.” The report endorsed the use of owners’ equivalent rent in the CPI and recommended that, “BLS should continue using rental equivalence as the primary approach to estimating the price of housing services for owner-occupied units.” We asked for expert opinion from the National Academy of Sciences, Committee on National Statistics, on better ways to measure price change for these important items. We are always working to improve the accuracy of the CPI, and that includes our shelter indexes. In effect, this means price increases for shelter can sometimes take longer to appear in the CPI than in some other data sources. Most prices are collected either monthly or every 2 months, but rent prices are collected every 6 months. Because of this, the process used to calculate the indexes for rent and owners’ equivalent rent differs from the process used to calculate the rest of the CPI. In some cases, the rent paid by tenants with multi-year leases increases periodically-and automatically, by the CPI itself-through an escalation clause in the lease agreement that cites the CPI for this purpose.īecause rents for existing tenants change in line with the terms of leases and rental agreements, and many leases are for 12 months, existing tenants typically do not face price change within the 12-month period of the lease. Landlords often raise rents when a unit is vacated by a prior tenant and a new tenant moves in. One reason for this is that over 80 percent of rental units in the CPI sample each period have tenants who continue to rent the same unit. Some people have noted that the CPI index for rent (which represents just over 7 percent of the weight of the CPI) is not rising as fast as some other measures, notably those published by firms in the real estate industry. ![]() These nonconsumption costs of owned housing are out of scope for the CPI under the cost-of-living framework that guides the index. Mortgage interest costs, property taxes, real estate fees, most maintenance, and all improvement costs are part of the cost of the capital good and are also not treated as consumption items. We treat spending to buy and improve houses and other housing units as investment and not consumption in the CPI. The concept in the CPI-and in the economic statistics programs of most other nations-is to treat owned housing as a capital or investment good, distinct from the shelter service it provides. ![]() It is also an investment, often the largest investment many people will make in their lives. Why don’t we just measure changes in home values in the CPI? It’s because a home isn’t just a consumption item for the owner. In fact, the sample of prices used in the owners’ equivalent rent index comes from observations of rent collected in our monthly survey of housing prices, but with utilities and other similar charges removed. That has contributed to a common misconception: the mistaken belief that the price observations used for owners’ equivalent rent in the CPI are also from homeowner estimates of their home’s rental value. That question asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” The role of this question can be easily misunderstood by even sophisticated users of BLS data. The expenditure weight for owners’ equivalent rent in the CPI is based on a question in the Consumer Expenditure Survey. It represents the implicit amount an owner of a housing unit would have to pay in rent to live in the unit, assuming it was leased instead of owned. Owners’ equivalent rent is the larger of these two components, at nearly one quarter of the consumer market basket, or weight, in the CPI. There is also a lot of misunderstanding about these shelter indexes, and so it is worth taking a few minutes to get a clear understanding of what they measure. ( Lodging away from home is the other component of shelter, and lodging prices rose 19.7 percent from April 2021 to April 2022.)Įditor’s note: Data for this chart are available in the table below.īecause of their large weight in the CPI market basket-nearly a third-the indexes for owners’ equivalent rent and rent can have a large impact on the overall inflation estimate. Its two main components, owners’ equivalent rent of residences and rent of primary residence, each increased 4.8 over the year. city average for shelter increased 5.1 percent from April 2021 to April 2022. ![]() That makes them a topic of considerable interest to users of Consumer Price Index (CPI) data. Shelter costs are the largest regular expense for most households.
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