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June 1982, Vol. 105, No. 6

Changing the treatment of shelter
costs for homeowners in the CPI

Robert Gillingham and Walter Lane

In late 1981, Commissioner of Labor Statistics Janet L. Norwood announced plans to change the procedures used to compile the homeownership component of the Consumer Price Index (CPI). Although the particular procedure used in compiling the CPI might seem dry and technical and of little general interest, such is not the case with respect to the homeownership component. The treatment of owner-occupied housing in the CPI has been one of the most widely discussed issues in economic statistics in recent years. The interest in this component stems from its substantial weight in the CPI and the sensitivity of the overall index—our most widely publicized measure of inflation—to the particular procedures used.

Currently, the homeownership component is based on house prices, mortgage interest rates, property taxes and insurance, and maintenance costs. This treatment captures elements of both the service flow and asset investment aspects of housing expenditures. The Bureau first raised questions about this component 10 years ago and, since then, has encouraged public review of alternative approaches. For some time, the Bureau staff has supported a change in favor of a treatment which would focus solely on the cost of the shelter services of owneroccupied housing, thus abstracting from investment aspects. The Commissioner believes that the increased general understanding of the issues surrounding this component, along with the growing problems inherent in continuing the current procedure, make a change imperative. This paper summarizes the proposed modifications and the reasons why an immediate decision to make them was necessary,1 describes the current treatment of homeownership to provide an understanding of the flaws in the current approach,2 explains why the proposed rental equivalence approach is the best alternative for improving the index, and outlines the technical procedures which the Bureau is currently implementing to ensure an adequate rental equivalence index.

This excerpt is from an article published in the June 1982 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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1 This section paraphrases Commissioner Norwood's statement of Oct. 27, 1981, announcing that the CPI would be changed.

2 This section is based on Walter Lane's, "The Costs of Homeownership," Seller/Service, September-October 1979.

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