period), and then sell it. This cost has three components: the interest foregone on the purchase price, the depreciation due to the physical wear and tear on the good, and any capital loss or gain other than wear and tear. At the time of purchase, the last two components are not known, so that user cost necessarily contains a speculative or expectational element.

The prices of durable goods should be converted to user cost before being aggregated into a price index, whether a basket price index or a COLI. The quantity that is used for pricing, directly in the Laspeyres or through the various approximations for a COLI, should be the stock of the good, because user cost is the cost of holding that stock for the year. Note that user cost introduces the (nominal) rate of interest into the consumer price index; user costs are higher at higher interest rates, as are both the cost-of-living and (properly computed) basket price indexes. (If higher nominal interest rates are a product of general price inflation, they will be largely offset in user cost by the expected price increase of the durable good over the holding period.)

There are a number of practical issues to do with user cost. One is whether to calculate it directly and, if so, what interest rate to use and how to proxy the expected capital loss or gain. If a car rental company faces the same costs of owning the car as does a consumer, so that competition sets price equal to cost, car rental rates ought to be close to user costs, and the “rental equivalent” can be used to construct the price index. If transactions costs are important, or are different for people and for rental companies, or if renters treat rental cars differently than their own cars, the two measures will not be equivalent. Currently, BLS treats cars as nondurable and works with user cost only for the “price” of owner-occupied housing. (Nonowners pay rents, which can be used directly.) If user costs are to be constructed directly, there are a number of practical issues associated with the treatment of capital gains. One possibility is to ignore them, but this causes problems when inflation rates are high. Another possibility is to use actual ex-post price movements, but this runs the risk of incorporating volatility into the index, and indeed of imputing negative user costs, and potentially even a negative CPI. Using ex-post capital gains also induces a perverse inverse relationship between the price of the durable and its user cost, at least in the short run. A CPI index that falls when complaints about the unaffordability of housing are the loudest would have difficulty gaining public acceptance. It would also be possible to forecast capital gains, or more simply just smooth the ex-post price changes. As is the current practice with housing, we believe that using rental rates is probably the best option.

It is possible to imagine moving to a user cost basis, not only for housing and cars but for other durable goods, such as household appliances and furnishings, electronic equipment, and even clothing. The whole concept of user cost ignores the fact that, if some people cannot get loans, not everyone has access to these goods by paying the user costs. How far to extend the user cost approach remains an important issue for BLS.



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