THE TREATMENT OF “HOME OWNERSHIP” IN THE CPI*

Thomas Rymes

Review of Income and Wealth, 1979, vol. 25, issue 4, 393-412

Abstract: This paper explores the imputed service price approach to the pricing of the services of consumer‐owned‐and‐used durables in the construction of the consumer price index, using the services of owner‐occupied housing as an illustration. A theoretical framework for analyzing this question is first developed. Certain practical problems are then discussed. The conceptual difficulty of constructing an appropriate rate of return on the basis of available data on interest rates and house prices, in the context of inflation, is explored. Two arguments are advanced that statistical agencies ought not to follow the imputed service price approach in pricing the services of owner‐occupied dwellings and other consumer durables. On the one hand, nominal interest rates will, in any short period, reflect monetary policy and not any change in the money “rental” of owner‐occupied houses. Second, movements in nominal interest rates will also reflect changes in the money price of pure consumption goods, as well as changes in the money price of houses. The argument is extended to other consumer durables and, in the limiting case, to monetary balances, and it is concluded that in all but trivial cases the application of the service price approach leads to price movements of little or no meaning.

Date: 1979
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