Measuring Changes in Shelter Prices in the Consumer Price Index

Shelter costs are the largest regular expense for most households. That makes them a topic of considerable interest to users of Consumer Price Index (CPI) data. The U.S. city average for shelter increased 5.1 percent from April 2021 to April 2022. Its two main components, owners’ equivalent rent of residences and rent of primary residence, each increased 4.8 over the year. (Lodging away from home is the other component of shelter, and lodging prices rose 19.7 percent from April 2021 to April 2022.)

Editor’s note: Data for this chart are available in the table below.

Because of their large weight in the CPI market basket—nearly a third—the indexes for owners’ equivalent rent and rent can have a large impact on the overall inflation estimate. There is also a lot of misunderstanding about these shelter indexes, and so it is worth taking a few minutes to get a clear understanding of what they measure.

Owners’ equivalent rent is the larger of these two components, at nearly one quarter of the consumer market basket, or weight, in the CPI. It represents the implicit amount an owner of a housing unit would have to pay in rent to live in the unit, assuming it was leased instead of owned. The expenditure weight for owners’ equivalent rent in the CPI is based on a question in the Consumer Expenditure Survey. That question asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” The role of this question can be easily misunderstood by even sophisticated users of BLS data. That has contributed to a common misconception: the mistaken belief that the price observations used for owners’ equivalent rent in the CPI are also from homeowner estimates of their home’s rental value. In fact, the sample of prices used in the owners’ equivalent rent index comes from observations of rent collected in our monthly survey of housing prices, but with utilities and other similar charges removed.

Why don’t we just measure changes in home values in the CPI? It’s because a home isn’t just a consumption item for the owner. It is also an investment, often the largest investment many people will make in their lives. The concept in the CPI—and in the economic statistics programs of most other nations—is to treat owned housing as a capital or investment good, distinct from the shelter service it provides. We treat spending to buy and improve houses and other housing units as investment and not consumption in the CPI. Mortgage interest costs, 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 nonconsumption costs of owned housing are out of scope for the CPI under the cost-of-living framework that guides the index.

Some people have noted that the CPI index for rent (which represents just over 7 percent of the weight of the CPI) is not rising as fast as some other measures, notably those published by firms in the real estate industry. One reason for this is that over 80 percent of rental units in the CPI sample each period have tenants who continue to rent the same unit. Landlords often raise rents when a unit is vacated by a prior tenant and a new tenant moves in. In some cases, the rent paid by tenants with multi-year leases increases periodically—and automatically, by the CPI itself—through an escalation clause in the lease agreement that cites the CPI for this purpose.

Because rents for existing tenants change in line with the terms of leases and rental agreements, and many leases are for 12 months, existing tenants typically do not face price change within the 12-month period of the lease. This is called a “sticky” price. Because of this, the process used to calculate the indexes for rent and owners’ equivalent rent differs from the process used to calculate the rest of the CPI. Most prices are collected either monthly or every 2 months, but rent prices are collected every 6 months. In effect, this means price increases for shelter can sometimes take longer to appear in the CPI than in some other data sources.

We are always working to improve the accuracy of the CPI, and that includes our shelter indexes. We asked for expert opinion from the National Academy of Sciences, Committee on National Statistics, on better ways to measure price change for these important items. The committee recently published their report, “Modernizing the Consumer Price Index for the 21st Century.” The report endorsed the use of owners’ equivalent rent in the CPI and recommended that, “BLS should continue using rental equivalence as the primary approach to estimating the price of housing services for owner-occupied units.”

I will say more about the report from the Committee on National Statistics soon. In the meantime, we will consider all the recommendations of this distinguished group as we plan future improvements to the CPI.

You can read more about shelter in our factsheet for rent and owners’ equivalent rent. We also have more technical details in the Handbook of Methods.