This one monthly cost might be skewing inflation data

We might not understand consumer prices as well as we thought we did.

Consumer prices may be more volatile than previously thought, based on current indexes, according to a new report from researchers at the Penn State Smeal College of Business.

The researchers analyzed how housing rent is currently factored into official price indexes, including the U.S. Bureau of Labor Statistics’ consumer price index (CPI) and the U.S. Bureau of Economic Analysis’s index for personal consumption expenditure (PCE).

Both of those indexes are designed to show price moves, based on the prices of a certain collection of consumer goods. But information about housing rent that both bureaus collect might lead to errors in the inflation rates, the Penn State researchers found.

Those bureaus did not immediately respond to a request for comment.

Here’s why: Both indexes use results from questionnaires that are sent out to existing tenants.

The Bureau of Labor Statistics sends out the questionnaires to the same people over time. As a result, they are usually collecting information from renters who are renewing their leases, and the price of renewing is usually less volatile than renting a new place.

“Landlords tend to increase rents when tenants change,” said Jiro Yoshida, an associate professor at the Penn State Smeal College of Business. “The official rent surveys, then, tend to miss that big change.”

That may seem like a small difference, but rent makes up a large part of inflation indexes, the researchers said. In 2016, housing made up one third of the CPI and 42% of the core CPI, which excludes food and energy. Rents account for 15.8% of the PCE and 17.7% of the core PCE.

As a result of their observations, the researchers came up with a new method for estimating inflation in housing rent, by using data including the Moody’s/RCA Commercial Property Price Index.

When they used their new method, they found that the official inflation rate was overestimated by 1.7% to 4.2% every year during the Great Recession. It is now underestimated by 0.3% to 0.9% annually, during the current period of economic expansion.

The findings could have important implications, Yoshida said. Cost-of-living adjustments are based on CPI. And using the new method, cost of living would be higher. For senior citizens who have retired, the new calculation could add substantial funds to their monthly benefits.