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1 1 (July 14, 2022)

handle is hein.crs/govehym0001 and id is 1 raw text is: Congressional Research Service Informing Ih legisative d bate smn'e 114 Housing and the Consumer Price Index July 14, 2022 Over much of 2021 and 2022, inflation in the United States has been high. Housing costs carry a relatively large weight in the calculation of overall price increases across many measures, notably in the Consumer Price Index (CPI) measure of consumer inflation. Given how much housing costs affect headline inflation numbers, accurate measurement of housing costs and their changes is crucial for accurately portraying inflation. Additionally, house prices are an important indicator of the health of housing markets and home affordability, so to the extent that housing inflation is used as an indicator of the housing market, accurate measurement is also important. However, recent readings have caused some confusion as CPI inflation in the overall housing category, and in the rental housing and owner-occupied housing subcategories, have been consistently lower than overall inflation, while certain measures of house price (such as purchase or list prices) increases have shown rates well above overall inflation. This In Focus examines how the price of housing is measured in the CPI, the way this measurement differs from other measures of housing prices, and what this measure does and does not indicate. Of note, this In Focus does not discuss trends in home affordability. For more information on those trends and relevant policy considerations, see CRS In Focus IF12048, High Home Prices: Contributing Factors and Policy Considerations, by Mark P. Keightley and Lida R. Weinstock. Housing in the Consumer Price Index The Bureau of Labor Statistics (BLS) produces a widely cited measure of consumer inflation called the CPI. The CPI measures price changes in a basket of commonly consumed household goods and services on a monthly basis and weights the items in the basket based on how consumers distribute their expenditures on them. The housing category of expenditure typically accounts for over 40% of total expenditures in the CPI, as can be seen in Figure 1-more than twice as large as the next largest category (transportation). Of note, this housing category includes many subcategories, such as shelter (rented and owner-occupied), fuels and utilities, and household furnishings and operations, among others. Despite the heft of the housing category in the calculation of the CPI, BLS does not include housing units (i.e., the actual buildings) in the CPI market basket. Similarly to many other economic series, housing units are considered to be capital (investment) goods as opposed to consumption items in the CPI. In other words, the purchase price of a home, renovation costs, or other improvements are not considered in the CPI as these are all investments that a homeowner will either recoup, realize a return on, or take a loss on in the future. Likewise, CPI does not include mortgage payments because these are payments toward the ownership of the house as an asset. However, BLS does consider the shelter portion of housing-the roof over one's head-to be a consumable and, therefore, the relevant price to capture. In this case, the price in question is rent, or in the case of owner-occupied houses, the rent that the owners would have to pay if they were renting their houses. This imputed rent is known as owners' equivalent rent (OER). Figure I. CPI Expenditure Weights 2019-2020 Weights Source: Bureau of Labor Statistics. Note: This chart represents only one way to categorize expenditure groups in the CPI. Owners' Equivalent Rent A challenge with measuring OER is that nobody actually pays it-an owner-occupier typically pays a mortgage-so it cannot be directly observed. In order to determine OER, BLS surveys comparable rental units and, based on the actual rent information gleaned, determines the imputed rent on the owner-occupied unit in question. BLS asks about prices of most items in the CPI on a monthly basis. However, it asks about rent only once every six months. Most renters have leases that span several months to several years, with rent fixed during that period. Therefore, in order to determine how rent changes over time, BLS surveys a unit every six months in order to allow time for leases to change. Practically, this involves surveying one group of rental units in January and July, the next group in February and August, and so on. Because the CPI is published on a monthly basis, BLS takes the sixth root of the six-month changes in any given month to determine an estimated single-month price change. Some economists and policymakers have pointed out potential problems with this methodology. First, owner- occupied markets and rental markets may be fairly different within the same localities. For example, a neighborhood made up largely of relatively expensive single family

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