The CPI for Rents: A Case of Understated Inflation

Abstract

Until the end of 1977, the method used in the U.S. consumer price index (CPI) to measure rent inflation tended to omit rent increases when units had a change of tenants or were vacant. Since such units typically had more rapid increases in rents than average units, this response bias biased inflation estimates downward. Beginning in 1978, the Bureau of Labor Statistics (BLS) implemented a series of methodological changes that reduced response bias but substantial bias remained until 1985. We set up a model of response bias, parameterize it, and test it using a BLS microdata set for rents. We conclude that from 1940 to 1985 the CPI inflation rate for rent most likely was understated by 1.4 percentage points annually in U.S. data. We construct an improved rental inflation series for 1940 to 2000; at the starting point in 1940, the revised index is 54 percent as large as the official CPI.

Keywords: Consumer price index, CPI, inflation, rent

JEL Classification: C81, C82, E31, O47, R21, R31