I recently got the question, Why does the CPI exclude rent? So I’m answering that here.
The Consumer Price index doesn’t exclude rent. It actually has an entire section entitled “Shelter”. But not everyone rents… some people actually own their own homes. So to cover everyone they created a sort of hybrid rent/ownership component to the CPI called “owner’s equivalent rent”.
According to the Bureau of Labor Statistics who calculate the CPI, “The expenditure weight in the CPI market basket for Owners’ Equivalent Rent of primary residence (OER) is based on the following question that the Consumer Expenditure Survey asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
The following questions, asked of consumers who rent their primary residence, are the basis of the weight for Rent: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies.
What period of time does this cover?” From the responses to these questions, the CPI estimates the total shelter cost to all consumers living in each index area of the urban United States.
The OER and Rent indexes have the largest weights of Consumer Price Index, Bureau of Labor Statistics, April 2009 the 211 item categories (item strata) that comprise the CPI market basket.”
A little more than 32% of the CPI is due to Shelter costs so not only don’t they disregard rent it is a major component of the CPI. As is Food and Energy which is the other component that people think is somehow not included.
Why Does the CPI Include Owner’s Equivalent Rent Instead of Mortgage Expenses?
The CPI doesn’t include mortgage expenses for the same reason it doesn’t include IRA or pension payments. Mortgage expenses include an investment component. The CPI excludes all investments since they aren’t really an expense since they can be converted back into cash at any time. But a portion of your mortgage and maintenance etc. are “sunk costs” you can’t recoup them, so the BLS assumes that those expenses work out to be about the equivalent of paying rent.
According to the BLS:
The consumption item that residences provide is the shelter service that their occupants receive. For renter-occupied dwellings, the cost of this service is the rent
the occupants pay for its use for a period of time. The most efficient way to measure the price of the shelter service owner-occupants receive from their homes is to estimate the rent that the residence would command.
The CPI represents all goods and services purchased for consumption by the reference population (U or W). [Note: Urban Consumers or Wage Earners, editor] BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education, and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls.
In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services. The CPI also does not include investment items, such as stocks, bonds, real estate, and life insurance because these items relate to savings, and not to day-to-day consumption expenses.
For each of the item categories, using scientific statistical procedures, the Bureau has chosen samples of several hundred specific items within selected business establishments frequented by consumers to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden delicious apples, U.S. extra fancy grade, weighing 4.4 pounds, to represent the apples category.
Additional information about published items and item classification structure is available in the CPI section of the BLS Handbook of Methods.
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- Inflation-Adjusted Housing Prices
- Do Housing Prices Always Go Up?
- Ways Inflation Affects the Real Estate Market
- Ways Inflation Affects the Real Estate Market Pt. 2
- Real Estate Trends: House Flipping
- Price Inflation vs Monetary Inflation
- What is Core Inflation?
- What is Deflation?
- What is Disinflation?
- What is Agflation?
- What is Stagflation?
- What is Hyperinflation?
- What is Quantitative Easing?
- What is the Velocity of Money?
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Mortgage is not included in the current CPI. The old CPI did include mortgage? So, the old CPI numbers are not a direct one-to-one comparison with new CPI numbers? Let me know if I am wrong about this. It seems adjusted-inflation rates may make better historical comparisons on dollar strength, than comparing an old with a new CPI rate. Those rates were accurate in their math, but the math equations changed making any attempt of comparison unsatisfied. Does that seem to line up with how you understand these things Tim?
Tim McMahon says
Well, a mortgage is an asset by switching to owners equivalent rent they took out the appreciation factor and made it cover just expenses and not investments. But when they switched to the new index they recalculated the prior index they didn’t just stitch the two indexes together. So there isn’t a disconnect between the data prior to 1984 and after 1984. The yardstick may have different sized inches than the old yardstick but we are measuring all the gas prices with the new yardstick if that makes sense.
All gas prices are measured by the new yardstick, but if we look at pre-1984 CPI and the post-1984 CPI the two do not match? The pre-1984 data is the same, and the post-1984 CPI can measure the pre-1984 data, but the pre-1984 and post-1984 CPI equations are different? The data is the same, but the equations are different. So, we have to know what CPI equation was used to calculate the data.
(It is still adirondack I had to change my name to match, for my memory, all the platforms I comment on from time to time.)
I ask, because I think I understand you; but I am hesitant if I completely do understand.