Housing Rents and Inflation Rates

Abstract

This paper demonstrates that inflation rates are significantly modified when they are based on the alternative quality-adjusted measure of housing rents that is based on a monthly statistic of landlord net rental income. The official rate was overestimated by 1.7% to 4.2% annually during the Great Recession but underestimated by 0.3% to 0.9% annually during the current expansionary period. We further demonstrate significant impacts of the modified inflation rates on Social Security and real gross domestic product. These impacts persist for a long term because the modified indexes are integrated of order one whereas the official indexes are trend stationary.

Keywords: measurement error, economic statistics, owners' equivalent rent, Consumer Price Index, Personal Consumption Expenditures, National Income and Product Accounts

JEL Classification: E01, E31, R31, H55