Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics

Abstract: The treatment of owner-occupied housing (OOH) is probably the most important unresolved issue in inflation measurement. How -- and whether -- it is included in the Consumer Price Index (CPI) affects inflation expectations, the measured level of real interest rates, and the behavior of governments, central banks and market participants. We show that none of the existing treatments of OOH are fit for purpose. Hence we propose a new simplified user cost method with better properties. Using a micro-level dataset, we then compare the empirical behavior of eight different treatments of OOH. Our preferred user cost approach pushes up the CPI during housing booms (by 2 percentage points or more). Our findings relate to the following important debates in macroeconomics: the behavior of the Phillips curve in the US during the global financial crisis, and the response of monetary policy to housing booms, secular stagnation, and globalization.

Keywords: Measurement of inflation, Owner occupied housing, User cost, Rental equivalence, Quantile regression, Hedonic imputation, Housing booms and busts, Inflation targeting, Leaning against the wind, Phillips curve, Disinflation puzzle, Secular stagnation

JEL-codes: C31; C43; E01; E31; E52; R31 July 2019

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