Measurement of Homeownership Costs in the Consumer Price Index Should Be Changed

PAD-81-12: Published: Apr 16, 1981. Publicly Released: Apr 16, 1981.

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Many economists, members of Congress, and others have questioned whether the consumer price index (CPI) as presently constructed by the Department of Labor's Bureau of Labor Statistics (BLS) is an appropriate measure of the rate of price change for the uses to which it is put. In particular, they have charged that the present method of measuring homeownership costs does not accurately reflect the rate of price change experienced by homeowners in paying for their housing. GAO determined the validity of these concerns and evaluated alternative methods of measuring changes in homeownership costs in CPI.

Homeownership costs have a relative importance of about 23 percent in CPI. The present homeownership component of CPI measures changes in the cost of purchasing, financing, and maintaining houses. Because of its emphasis on these cost changes the CPI homeownership component does not measure either the average change that all homeowners experience or the change in cost for an average homeowner. In addition, the present approach to measuring homeownership costs allows no logical determination of the weight assigned to expenditures on housing in calculating the overall CPI. User cost and nominal outlays are two widely discussed conceptual approaches to measuring the cost of consuming housing services. The user approach measures full economic costs of consuming housing services. The nominal outlays method includes only out-of-pocket expenses, not the full economic costs that homeowners incur. Rental equivalence and a user cost index are two methods of measuring user cost. Rental equivalence views the user as the rental income homeowners forgo by residing in their houses rather than renting them to others. Both the rental equivalence and nominal outlays approaches to measuring the cost of consuming owner-occupied housing services have substantial merit. BLS currently publishes five experimental measures of CPI in which homeownership costs are measured by rental equivalence, user cost indexes, and nominal outlays.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: If BLS revises CPI-U but not CPI-W, then Congress should rely on the revised CPI-U in forming economic policy and amend the legislation, if necessary, to use the revised CPI-U as the index by which social security payments, Civil Service and other Government retirement pensions, and other entitlement and transfer programs indexed in the CPI are adjusted.

  2. Status: Closed - Not Implemented

    Comments: BLS modified the CPI-U in a way consistent with the recommendation in January 1983. No additional funds were requested for this specific purpose.

    Matter: The appropriations committees of Congress should consider favorably any BLS requests for additional funds for the purpose of modifying the homeownership components of the CPI as GAO has recommended.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Labor should direct BLS to continue publishing CPI-W in its current form for a specified period of time while modifying CPI-U as recommended if it is determined that the existence of long-term contracts incorporating CPI-W and a widespread desire among private sector groups to have available an index of consumer prices using the present approach provide sufficient reasons for maintaining such an index.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of Labor should direct the Commissioner of BLS to amend indexes of consumer prices published by BLS by substituting a flow-of-services approach to measuring the cost of consuming owner-occupied services for the present method of measuring homeownership costs.

    Agency Affected: Department of Labor

 

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