New CPI series reveals higher US rental inflation 1914-2006
A new working paper from the Federal Reserve Bank of Philadelphia constructs a revised Consumer Price Index for 1914-2006, revealing significantly higher rental price inflation than official estimates. The study explains the "falling real rents" puzzle by consistently applying owners' equivalent rent.
Unraveling the 'falling real rents' puzzle
The Bureau of Labor Statistics' (BLS) Rent of Primary Residence (RoPR) series implies nominal rental prices grew by only 2.6% annually from 1914 to 2006, while overall prices rose 3.3%.
This "falling real rents" puzzle, where housing costs seemingly lagged other prices, is addressed by the paper.
The authors show this discrepancy stems from inconsistent methodologies in treating shelter within the CPI, particularly regarding vacancy and survey nonresponse biases prior to the mid-1980s.
The original CPI also varied in its measurement of homeowner housing services, shifting from tenant rents only to a home purchase component, and finally to owners' equivalent rent (OER) in 1983.
This historical inconsistency distorted long-run trends in the cost of living.
A new benchmark for cost of living
The paper constructs a new, methodologically consistent shelter price series using the Historical Housing Prices (HHP) Project rental index.
This index, derived from historical newspaper listings, uses a flexible hedonic approach to adjust for housing characteristics.
By standardizing the treatment of shelter with a consistent owners' equivalent rent (OER) concept for the entire 1914-2006 period, the authors create an alternate CPI.
This revised series shows nominal rents grew by 3.7% per year, significantly higher than the 2.6% suggested by RoPR.
Overall CPI growth is lifted from 3.3% to 3.6% annually, eliminating the long-run decline in real rents.
More than just a statistical adjustment
This research is more than a technical statistical revision; it fundamentally alters our understanding of 20th-century U.S. economic history.
By correcting for historical biases in rental inflation, the study suggests that the standard of living has increased less than previously believed since World War I. Its consistent methodology for measuring shelter costs offers a robust foundation for future analyses of real income and cost-of-living comparisons, highlighting the critical importance of accurate housing data in economic measurement.