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Measuring Price Change in the CPI: Rent and Rental Equivalence

The index for shelter, the service that a housing unit provides its occupants, is one of the largest parts of the CPI market basket—the goods and services that American households consume. Owners’ equivalent rent of residences (OER) and rent of primary residence (rent) measure most of the change in the shelter cost consumers experience. All three of these series are published each month in each area for which CPI data are published.

The CPI for shelter also includes lodging away from home and tenants’ and household insurance. This factsheet focuses only on rent and OER, however.

Item definition

The shelter service that a housing unit provides to its occupants is the relevant consumption item for the CPI. Most of the cost of shelter for renter-occupied housing is rent. For an owner-occupied unit, most of the cost of shelter is the implicit rent that owner occupants would have to pay if they were renting their homes, without furnishings or utilities.

Owned housing units themselves are not priced in the CPI Housing Survey. Like most other nations' economic statistics programs, the CPI program views owned housing units as capital (or investment) goods distinct from the shelter service they provide, and therefore not as consumption goods. Spending to purchase and improve houses and other housing units is treated as investment and not consumption in the CPI. Interest costs (such as mortgage interest), property taxes, real estate fees, most maintenance, and all improvement costs are part of the cost of the capital good and are also not treated as consumption items. These non-consumption costs of owned housing are out of scope for the CPI under the cost-of-living framework that guides the index.

Data Sources

The data used as inputs in the construction of the index for shelter, as well as the indexes for rent and OER, are collected in two surveys. The Consumer Expenditure (CE) Survey asks households for the share of their budget which goes towards different categories of goods and services. Their responses are subsequently used by the CPI program to create weights for index estimation. The CPI Housing Survey collects price observations of rental housing units in urban areas across the United States.

Relative Importance

The relative importance of an item is its percent of total consumer spending covered by the CPI market basket as of December of the most recent year.

Table A. Relative importance, December 2023
Item	Relative Importance
Shelter	36.191
Rent of primary residence	7.671
Lodging away from home	1.338
Owners’ equivalent rent of residences	26.769
Owners’ equivalent rent of primary residence	25.440
Unsampled owners’ equivalent rent of secondary residences(1)	1.329
Tenants’ and household insurance	0.413
Footnotes: (1) Rental equivalence for vacation homes and timeshares exist as items in the Consumer Expenditure Survey (UCC 910105, 910106, and 910107) and have a small amount of weight in the CPI as Unsampled owners’ equivalent rent of secondary residences (ELI HC090), but as this item is unsampled, no price quotes are actually collected for it.

The BLS uses data from owner-occupied units in the Consumer Expenditure Survey to derive expenditure weights. The expenditure weight in the CPI market basket for OER is based on the following question that the CE 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 Consumer Expenditure Survey asks the following questions of renter-occupied units to derive the expenditure weight for rent:

“What was your total rental payment for this month for this unit? Include any extra charges for garage or parking facilities, but do not include direct payments by local, state or federal agencies.”

From the responses to these questions, the CPI program estimates the total shelter expenditure to all consumers living in each index area of the urban United States, which is then used to weight the OER index. Note that these responses are not used in estimating price change for the shelter categories, only the weight. For more information about the relationship between reported rents captured by the Consumer Expenditure Survey and OER, see Reconciling User Costs and Rental Equivalence: Evidence from the U.S. Consumer Expenditure Survey.

Sample selection

Housing units are selected in proportion to their share of total spending on shelter. Total spending on shelter includes the total spending on rented and owned housing units, as collected in the CE Survey. Using data from the Decennial Census of Population and Housing, the CPI program defines small geographic areas, called segments, within each of the CPI pricing areas. In most cases, segments are composed of one or more Census block groups. The Census provides the number of renter and owner housing units in each segment and the average rent of the renter units in each segment. The missing piece not available from Census is the average owner cost for the owners in the segment. BLS estimates this average implicit rent of the owner units in the segment by modelling Consumer Expenditure Survey renter equivalent values and applying those parameter estimates to each sampled segment, enabling the CPI program to calculate the total spending (rent plus implicit rent) for each segment. The CPI program selects a sample of segments in each pricing area using stratified sampling in proportion to total shelter value. BLS data collectors visit a small number (usually 5) of renter-occupied housing units selected to represent each segment.

The Housing Survey sample design generates a weight for each housing segment in the sample. The segment weights are denoted U_i,α, where i denotes a unit and a denotes a geographic area, in equations 1 and 2 below. A segment’s weight is its share of the renter and owner spending within the geographic area. Each housing unit within a segment inherits the same basic weight as the segment weight. Part of each segment’s weight represents renter housing, and the rest represents owner housing. As noted earlier, owner-occupied units are not priced in the CPI Housing Survey. To make the segment weights specific to the renter universe, a factor, denoted α_i,α, which is equal to the renter share of total (owner and renter) spending in the unit’s segment, is applied to the sampling weight of each unit. To make the weights specific to the owner universe, (1 - α_i,α), the complement of the rent factor, is applied to segment weights in the formula for OER. Thus, each segment’s weight is allocated between renter housing and owner housing.

Some units represent only renter units; for these units, α_i,α=1. For example, rental units under rent control do not represent any owner-occupied housing units. Sample rental units in largely owner-occupied neighborhoods mainly represent owner housing, so their α_i,α can be near 0.

Owner-occupied housing and rental housing often have a different proportion of detached houses and other structure types. The CPI Housing Survey is designed to be representative of rental housing, so a structure type adjustment factor, F_s,_j,α in equation 1, is included in OER calculations. It allocates more weight to structure types that the Census's American Community Survey (ACS) 5-year data estimate to be more prevalent in the segment's owner-occupied housing than among the segment's sampled units. In a segment, F_s,_j,α is a quotient of detached housing’s estimated share of a segment’s owner-occupied units and detached housing’s share of responding units for the segment, capped to be no more than 2 or less than 0.5.

Price Change and Quality Adjustment

The CPI program collects rent data from each sampled unit every 6 months. Many rents change infrequently, being locked in place for a given lease term, and collecting rent data less frequently allows for a larger sample. Most rents included in the sample are continuing rents, and only a minority of observations are rents which have changed since the previous observation period. The CPI program divides each area’s rent sample into six subsamples called panels. The rents for panel 1 are collected in January and July; panel 2, in February and August, etc.

Owner-occupied units are not interviewed in the CPI Housing Survey; the Housing Survey sample contains only rental units. When a rental unit is on panel, CPI data collectors obtain the current rent, what additional services (for example, utilities) are included, and information on any changes to the unit or the rent that has occurred since its previous pricing six months ago.

Quality adjustment

Using the sample of rental units, the CPI program calculates a measure of price change for each CPI index area for the rent and OER indexes. The first step is standardizing the collected rents so that all rents are on a monthly basis. These standardized rents are called normalized rents. The normalized rents are then adjusted for any quality changes such as an additional bedroom or bathroom, changes to the type of heating and cooling equipment, and changes in extra charges such as an increase in total pet fees.

The CPI program also adjusts rents for the effect of aging over time. Rents are collected for the same housing units every 6 months. Consequently, each time the CPI observes the rent of a sample unit, it is 6 months older. To account for this aging, an age-bias factor is applied to the previous rent. For additional information about this process, see A review of recent improvements to the CPI’s housing age-bias adjustment.

For the rent index, the CPI program computes what it calls the economic rent which removes the value of any changes in what is included in the rent between collections. For each sample unit, the CPI program estimates the cost of five types of utilities and makes appropriate adjustments to rents. The types include three energy utilities plus water and sewer service. For water and sewer service, the CPI program has estimates of their average cost in each of the CPI pricing areas, which are updated monthly using the movement of the CPI index for water and sewerage maintenance. For the three energy utilities, the CPI program estimates the quantity (in British Thermal Units, or BTUs) of electricity, natural gas, and fuel oil that each rental unit in the CPI Housing Survey uses. The CPI program then estimates a monthly value for each energy utility using these quantities and CPI average price data.

To estimate the quantities of electricity, natural gas, and fuel oil, BLS uses data from the Department of Energy’s Residential Energy Consumption Survey (RECS) to estimate formulas for each of the three energy types. The formulas predict a housing unit’s energy consumption from the following characteristics and variables:

The number of bedrooms and other rooms
The fuel used for heating
The fuel used for heating hot water
The Heating/Cooling Degree Day Zone for the CPI pricing area
The type of structure
The decade when the structure was built
The type of air conditioning
The Census Region of the urban area

Inserting each housing unit’s characteristics into a regression equation for a type of energy yields a predicted quantity of energy consumed.

To value these estimated quantities, the CPI program uses the following average price series: utility (piped) gas per therm, electricity per KWH, and fuel oil #2 per gallon (3.785 liters).

The Housing Survey converts these to price per BTU to make them consistent with the predicted quantities. Each housing unit’s cost for each of the three utilities is its estimated consumption amount times an estimate of its index area’s average utility price. The Housing Survey uses a 12 month moving average of average prices from preceding months (t-1 through t-12) since average prices for the current month are not available.

To calculate price relatives for the OER index, the CPI program calculates what it calls the pure rent from the normalized rent, removing the value of any utilities that are included in the rent. Owner-occupants pay for their own utilities, and the CPI program accounts for them outside of shelter.

Price Change

Equation 1: calculation of the monthly relative of price change for OER in area α

The numerator and the denominator in the formula are weighted averages of the pure rents in month t and t-6. The weights are the sample unit weights U_i,α adjusted by (1 - α_i,α), which is the complement of the rent factor, and F_s,_j,αthe structure adjustment factor. The ACS data used for adjusting unit-level weights in both the numerator and denominator will be the latest available 5-year estimates. These estimates, which are typically released annually in December, are used as benchmarks starting the following month, in January, and remain in use for the following year. Structure adjustment factors are calculated at the segment (s) level and for two separate structure categories (j). One category is the quotient of detached housing’s estimated share of a segment’s owner-occupied units and detached housing’s share of responding units for the segment. The second category is the same calculation for non-detached housing.

Dividing the average pure rent for the current month (t) by the average pure rent from 6 months earlier (t-6) yields the 6-month relative of price change. The sixth root of this relative is the 1-month change in OER for index area α.

Equation 2: calculation of the monthly relative of price change for rent in area α

Equation 2: calculation of the monthly relative of price change for rent in area Equation 2: calculation of the monthly relative of price change for rent in area Equation 2: calculation of the monthly relative of price change for rent in area α

The numerator and the denominator in the formula are weighted averages of the economic rents in month t and t-6. The weights are the sample unit weights U_i,α adjusted by the rent factor α_i,α. Dividing the average economic rent for the current month (t) by the average economic rent from 6 months earlier (t-6) yields the 6-month relative of price change. The sixth root of this relative is the 1-month change in rent for index area α.

Construction of the elementary indexes for each area from the monthly relatives of price change is a straight–forward chaining, as shown in equation 3.

Equation 3: construction of elementary indexes

The index for period t is computed by multiplying the index for period t-1 by the relative of price change from t-1 to t.

The final step is to combine the elementary indexes into indexes for aggregates, such as the U.S. city average OER index and U.S. city average rent index, using the aggregation weights described above. The CPI program uses the same method for all its aggregate indexes. Aggregation weights are updated annually based on a single calendar year of data.

Imputation

Sometimes the CPI program cannot collect data for a sample housing unit. When this occurs, the CPI program imputes price change for the non-collected units. After calculating the current month indexes, the CPI program calculates an economic rent and a pure rent for them for use in the future. These imputed values are the previous t-6 values multiplied by the relative of price change for the current month t. This has the effect of assuming that the missing observations had the same movement as the non-missing ones during the period they were missing; the CPI will reflect any additional price movement for them when data collection for these housing units resumes.

The CPI program assumes that sample units reported to be vacant are transitioning to new tenants. Experience with rent data has shown that units tend to experience rent change when the tenant changes. To avoid missing this rent change for vacant units, the CPI program performs a special class-mean imputation to estimate their rents. The estimated current rent of a vacant unit is its previous rent times the average rent change of newly occupied units. For example, if the average rent increase for new tenants in an area was 5 percent, a currently vacant unit that rented 6 months earlier for $1,000 would have an estimated current rent of $1,050. In effect, this assumes that the rent of the vacant unit is increasing at the same rate as recently occupied units in the same area. The CPI will reflect any subsequent price movement for these units when they are no longer vacant and data collection resumes.

Data

Access CPI data for shelter, rent of primary residence, and owners’ equivalent rent of residences in our online database.

Additional information

Additional information may be obtained from the CPI Information Office by email or calling 202-691-7000. Information on the CPI's overall methodology can be found in the BLS Handbook of Methods.

Last Modified Date: June 13, 2024