Institutional Affiliation: Northwestern University
|Downward Bias in the Most Important CPI Component: The Case of Rental Shelter, 1914-2003|
in Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, Ernst R. Berndt and Charles R. Hulten, editors
|A Century of Housing Shelter Prices: Is There a Downward Bias in the CPI?|
with : w11776
Tenant rental shelter is by far the most important component of the CPI, because it is used as a proxy for owner-occupied housing. This paper develops a wide variety of current and historical evidence dating back to 1914 to demonstrate that the CPI rent index is biased downward for all of the last century. The CPI rises roughly 2 percent per year slower than quality-unadjusted indexes of gross rent, setting a challenge for this research of measuring the rate of quality change in rental apartments. If quality increased at a rate of 2 percent per year, the CPI was not biased downward at all, but if quality increased at a slower rate of 1 percent per year, then the CPI was biased downward at a rate of 1 percent. Our analysis of a rich set of data sources goes backward chronologically, start...