and national statistical agencies, a powerful argument can be made that the CPI in any period should measure the price of consumption in that period. In that case the index ought to include not the price that consumers pay for a durable good at the time of purchase, but the estimated cost of the services rendered during the subsequent periods in which the good is owned. In the case of owner-occupied housing, the BLS has, since 1983, estimated (“imputed”) a monthly price of the services rendered by that housing (i.e., shelter services). In all other cases the price of a consumer capital good is entered in the month when it is purchased.

There are two ways of estimating the price of the flow of services from consumer capital goods. The first is to estimate the “user” cost of the service (i.e., the cost to a consumer of buying a good at the beginning of a period, using its services during the period, and selling it at the end). Among many other difficulties, the user cost concept would deduct a capital gain (or add a loss) realized by the owner in the transaction. Housing prices can be volatile, and this method of estimating the cost of shelter services can sometimes produce the paradoxical result that just as housing prices are rising rapidly the user cost estimate will show a decrease in the shelter component of the CPI. An alternative method of estimating the cost of housing services, and the one currently used by the BLS, is to try to find a sample of rental housing that is equivalent in quality to owner-occupied housing and use the change in rents within that sample as a measure of changes in the cost of owner-occupied shelter services. This method also poses measurement difficulties of various kinds, including the difficulty of finding, in each geographical area for which the BLS collects prices, a representative sample of rental housing that is truly equivalent to owner-occupied housing.

While a strong conceptual case can be made for incorporating into any index of the price of consumption an estimate of changes in the monthly cost of the services provided by owner-occupied housing and other long-lived capital goods (see Chapter 2), there are some countervailing considerations. For potential low-income home buyers, who are cash constrained and at the margin of acceptability for mortgage loans, sharp changes in housing prices can have a greater impact on their cost of living than would be reflected in cost estimates of the flow of services. And it has been argued that, since the CPI is used as a guide for monetary policy, it should reflect volatile changes in consumer asset prices, as is the practice in a number of other countries (Goodhart, 2001). (We point out in Chapter 7, however, that governments and central banks have plentiful staff resources to consider the effect of changes in assets prices as they relate to monetary policy, even if they are not included in the official index of consumer prices.)

The practices of other countries with respect to housing vary widely. Because of the conceptual and measurement difficulties, many countries simply exclude owner-occupied housing from their consumer price index altogether. A few use the net acquisition price of owner-occupied housing; a few others, in addition to the United States, use equivalent rent; some use a cash flow approach—the sum of down payments, mortgage principal, and interest payments,



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