This article has been reviewed according to Science X's editorial process and policies. Editors have highlighted the following attributes while ensuring the content's credibility: Tracking rent prices may help businesses and policymakers understand where inflation is headed months in advance of government inflation reports, according to researchers at Penn State's Smeal College of Business who developed the Penn State/ACY Alternative Inflation Index. The Penn State index was recently incorporated into the Bloomberg Terminal, a software system that serves financial professionals with real-time market data, news and analytics.
Introduced by Penn State professors Brent Ambrose, Ed Coulson and Jiro Yoshida, the Penn State/ACY Alternative Inflation Index tracks marginal rent—what commercial landlords charge to lease new housing units at current market rates—to measure inflation. This approach differs from the housing component of the Consumer Price Index released monthly by the U.S. Bureau of Labor Statistics (BLS), which relies on surveys of mainly renewal rental rates for long-term tenants that may reflect older price movements in the housing market, the researchers explained.
Ambrose, the Jason and Julie Borrelli Faculty Chair in Real Estate and director of the Borrelli Institute for Real Estate Studies (BIRES) at Penn State, and Yoshida, the Arthur P. Pasquarella Professor of Business and BIRES associate director, explain in the following Q&A why rent prices are crucial for understanding inflation and how their index can help professionals and policymakers plan for future economic needs. Ambrose: Rents make up about 40% of the inflation indices that the government uses—the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index.
It is the largest single component of the inflation index and is often considered less volatile than other factors driving inflation, like gas or food. We show that rent is not as stable as is often considered. Yoshida: In the recent past, when CPI inflation has been regarded as very stubborn or very high, a majority of that high inflation was due to the housing component.
The reason is that the CPI survey relies on renewal rent, which tends to steadily increase over time. So, even though other prices like food and energy fluctuate and may even decrease, the housing component remained positive and high, which in the past created very stubborn CPI inflation. Experts' perception, analysis and policymaking depend on that CPI reading.
Yoshida: Our index captures market conditions in a more vivid way than the method that the government uses. The government has used the current method for measuring CPI and PCE for years. Because they like to maintain consistency over time, they cannot really change their methodology quickly.
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