In 1983 The Department of Labor removed housing prices from the Consumer Price Index (CPI) in favor of a concocted metric called "Owners' Rental Equivalence".

TheAMD.com has observed there was no defensible basis for the change based on modern economics or an understanding of consumer behavior. 

Links:
The CPI Inflation Methodology is Deeply Flawed and Defies Housing Reality
The United States Continues to Experience Real Price Deflation

The purpose of altering the price index calculation was to remove a component of the CPI which was volatile and inflationary, and replace it with one that was innocuously predictable.

Owners' Rental Equivalence is a fraud which does not accurately reflect the cost of housing or homeownership. 

A Graphical Analysis

The following is a chart of Owners' Equivalent Rent during the Housing Bubble.




During the 9 year period from 1997 through 2005, Rental Equivalence increased by 30.1%.  "Home Price Inflation" was apparently modest and linear during the largest Housing Bubble in history.

The following chart includes an added Straight Line with a slope of 3.5% for illustrative purposes. 




Inflation was wildly underreported during the Housing Bubble as the Bureau of Labor Statistics used the equivalent of a straight line as a proxy for home prices.  Owners' Equivalent Rent accounts for about 24% of the CPI.  The convenient use of OER instead of housing prices has allowed the Government to claim stable prices and moderate inflation for almost 30 years.

At no time was this housing price dichotomy more apparent than during the Housing Bubble. 

The following chart presents the Case-Shiller 10-City Price Index relative to CPI Owners' Rental Equivalence.




Housing prices are a central component of consumer inflation.  Ignoring actual costs in favor of a metric decoupled from reality to estimate consumer price changes is indefensible.

The price of houses tripled nationally (+189.7%), yet inflation figures were calculated assuming a 32.5% rise in the cost of homeownership. 

A Dose of Reality

Since the Obama Housing Bubble began in May 2006, though, an interesting thing has happened.  The Owners' Rental Equivalent Line, which was uninfluenced by the Housing Bubble and subsequent Bust, has broken. 




Not only is this figure no longer appreciating linearly at 3.5% a year, it has been steadily declining.  While the declines are small in real terms and relative to the housing price correction, they are today contributing to CPI deflation.

The figures are still fantastical and unreflective of actual price inflation/deflation, but it is amusing that a tool manufactured to mute reported price changes is finally causing policy makers a headache as it ceases to behave as intended.