Measuring housing services inflation

Abstract

MEASURING HOUSING SERVICES INFLATION Recent papers have questioned the accuracy of the Bureau of Labor Statistics’ methodology for measuring implicit rents for owner-occupied housing. We propose cross-checking the BLS statistics using data on owner-occupied and rental housing from the American Housing Survey. A hedonic approach that explicitly calculates capitalization rates produces a methodologically consistent measure of the rental cost of owner-occupied housing. Applying this method, we find that between 1985 and 1993 the Consumer Price Index overstated the increase in the cost of owner-occupied housing services by more than 10 percentage points. Address correspondence to: Leonard I. Nakamura Research Department Federal Reserve Bank of Philadelphia 10 Independence Mall Philadelphia, PA 19106 215-574-3804 (office) 215-574-4364 (fax) leonard.nakamura@phil.frb.org (email) Note that the BLS does not attempt to make the CPI a consistently measured series. Stewart and Reed (1999) discuss this issue and construct a version of the CPI that is intended to be consistently measured, covering the period from 1978 to 1998. See Smith et al. (1988) for a discussion of the user cost of capital for owner-occupied and rental housing. MEASURING HOUSING SERVICES INFLATION