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Downward Bias in the Most Important CPI Component: The Case of Rental Shelter, 1914–2003

Downward Bias in the Most Important CPI Component: The Case of Rental Shelter, 1914–2003

Chapter:
(p.153) 6 Downward Bias in the Most Important CPI Component: The Case of Rental Shelter, 1914–2003
Source:
Hard-to-Measure Goods and Services
Author(s):
Robert J. GordonTodd vanGoethem
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226044507.003.0007

This chapter develops new price indexes from a variety of sources to assess the hypothesis that the Consumer Price Index (CPI) for rental shelter housing has been biased downward for its entire history since 1914. Rental shelter housing is the most important single category of the CPI, especially for those years when rent data have been used to impute price changes for owner-occupied housing. If valid, the implications of the hypothesis of downward bias would carry over to the deflator for personal consumption expenditures (PCE) and, in the opposite direction, to historical measures of real PCE and real gross domestic product. The results show strong support for the hypothesis. The bias appears to have been particularly large, on the order of −1.0 percent annually, prior to the methodological improvements in the CPI that date from the mid-1980s.

Keywords:   consumer price index, rental shelter housing, personal consumption expenditures, gross domestic product

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