Disentangling Rent Index Differences: Data, Methods, and Scope

Abstract

Rent measurement determines 32 percent of the CPI. Accurate rent measurement is therefore essential for accurate inflation measurement, but the CPI rent index often differs from alternative measures of rent inflation. Using repeat-rent inflation measures created from CPI microdata, we show that this discrepancy is largely explained by differences in rent growth for new tenants relative to all tenants. New-tenant rent inflation provides information about future all-tenant rent inflation, but the use of new-tenant rents is contraindicated in a cost-of-living index such as the CPI. Nevertheless, policymakers should integrate new-tenant inflation into inflation forecasts and monetary policy decisions.

Keywords: house prices, rent growth, inflation measurement, monetary policy, forecasting, marginal rent growth, average rent growth

JEL Classification: E31, E37, E27, H31