Chapter

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

Robert J. Gordon and Todd vanGoethem

in Hard-to-Measure Goods and Services

Published by University of Chicago Press

Published in print November 2007 | ISBN: 9780226044491
Published online February 2013 | e-ISBN: 9780226044507 | DOI: http://dx.doi.org/10.7208/chicago/9780226044507.003.0007
Downward Bias in the Most Important CPI Component: The Case of Rental Shelter, 1914–2003

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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

Chapter.  18908 words.  Illustrated.

Subjects: Microeconomics

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