Measuring housing services inflation

Abstract

Recent papers have questioned the accuracy of the Bureau of Labor Statistics' methodology for measuring rent increases and changes in implicit rents for owner-occupied housing. We cross-check 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 equivalent of owner-occupied housing services. 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 and underestimated the increase in rents by almost six percentage points. The increase in the cost of housing services for renters and homeowners combined was overestimated by 0.6 percent a year between 1985 and 1993.