Gimme Shelter!
Two recent studies have concluded that for roughly four decades the measure of inflation
for rents in the U.S. consumer price index was substantially underestimated. Why should
this mismeasurement be of concern? In this article, Len Nakamura explains that rents are important in measuring the price of housing services for homeowners as well as renters. They are also the main standard against which market participants and others weigh the reasonableness of house prices. In addition, such mismeasurement affected the estimated rate of overall inflation faced by U.S. households during this historical episode.Measuring rental inflation accurately is important because rents are the largest component in the U.S. consumer price index, representing fully one-third of the consumption basket.
According to official U.S. data, while all prices have been rising, rents have been rising more slowly than other prices. From 1942 to 2003, rents, as measured by the U.S. consumer price index, went up less than ninefold, while the consumer price index, excluding shelter, went up more than 10-fold. Thus, the ratio of rents to other prices is 20 percent lower than it was in the 1940s. However, this relative decline took place roughly between 1942 and 1985 — a period during which, as two new studies suggest, rental inflation was underestimated.
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