What are the economic consequences of not including home prices in inflation measurements?
Why leaving home prices out of inflation misleads policy and families.
A popular misconception about government inflation numbers is that the cost of housing is included in the calculations. Unfortunately, house prices are not included – for no good reason. Of course, excluding home prices from inflation measurements (CPI and PCE)* masks significant cost-of-living increases, distorts monetary policy decisions, and misrepresents economic reality for many households.
Government economists may object and claim inflation numbers do capture housing inflation through its calculation of “owner’s equivalent rent,” an estimate of how much a homeowner would have to pay in rent to live in their own home. But this calculation doesn’t capture fluctuations in actual home purchase costs, such as mortgage costs, property taxes, utilities and insurance. This leads to understated inflation during housing booms and overstated inflation during slowdowns.
One other major flaw with this calculation is that most economists consider home prices a capital expense and not a consumer expense! They miss the concept of inflation being a consumer price concern – even if the government ignores it.
But let’s look at some other results of excluding home prices in inflation calculations…
Impact on Monetary Policy
Central banks, including the Federal Reserve, rely heavily on inflation data to guide interest rate decisions. If rapid increases in home prices are not reflected in core inflation metrics, policymakers may underestimate inflationary pressures, potentially keeping interest rates too low for too long. This misalignment can exacerbate asset bubbles or delay crucial policy responses.
Distorted Economic Signals
Homeownership is a major driver of household spending and economic activity, accounting for about 18% of GDP and nearly one-third of family budgets. By omitting actual home prices and instead using imputed rents, inflation metrics fail to reflect the true affordability crisis faced by buyers, particularly in periods of rapid price growth. This may misguide consumers, businesses, and policymakers regarding the strength or weakness of consumer purchasing power and economic reality.
Consequences for Households
When home price inflation outpaces general inflation and is not included in official measurements, families trying to buy homes face higher expenses than inflation data suggests. This can erode household wealth, skew wage negotiations, and misrepresent real living standard changes.
Lagged and Inaccurate Cost Data
Shelter inflation and “owners’ equivalent rent” often lag behind actual home purchase price trends, sometimes taking 12–18 months to catch up. This delay means inflation reports may be outdated, overshooting or undershooting reality and further distorting both policy and public perception.
PCE is the Personal Consumption Index (PCE) - All goods and services consumed by urban and rural consumers, and includes institutional populations - including those paid by third parties (e.g., employers, government)
Excluding home prices from inflation measurement creates blind spots for policymakers and consumers alike, with real consequences for monetary policy, household finances, and the accuracy of economic indicators. There exists no good reason to exclude home prices in inflation calculations – other than to intentionally misrepresent current economic conditions for the masses.
