Between 1999 and 2006, there were two episodes during which inflation in the Consumer Price Index (CPI) diverged markedly from inflation in the index for Owner's Equivalent Rent (OER); early in 2007, these series began to diverge again. Such divergence often prompts many to question CPI methods. A key difference between these two series is that OER indexes are based upon rents which have received a utilities adjustment -- an adjustment which is necessary because the OER index is intended to track pure rent-of-shelter, not shelter-plus-utilities. Critics have claimed that the CPI-OER inflation divergences stem from inappropriate utilities adjustment.
This claim is false. There is only one divergence episode -- of only six months duration -- which is primarily attributable to the utilities adjustment procedure. Indeed, the utilities adjustment sometimes reduced potential divergence between the two series. Instead, the main factor is rental market segmentation; that is, different rent inflation rates were experienced by different parts of the rental market. Before 2003, the CPI-OER inflation divergence mainly resulted from divergent rental inflation rates within metropolitan areas: areas with a higher proportion of renters experienced higher rental inflation. Compared to other units, rent control units experienced higher inflation in 2004 (and, to a lesser extent, before mid-2001 and in 2006), which increased CPI Inflation but not OER inflation. Finally, in early 2007, there was a sizable divergence between OER and CPI inflation, again driven by divergent rental inflation rates within metropolitan areas. The extent of the divergence only becomes evident once the effect of the utilities adjustment is accounted for.
1. It can be inferred from the passage that which of the following would most probably be a point of contention between the critics mentioned in the first paragraph and the author of the passage?
(a) why utilities adjustments are necessary when comparing the CPI and OER indices
(b) the definitional difference between the CPI and OER indices
(c) when rent control units experienced higher inflation that non-rent control units
(d) the underlying cause of CPI-OER inflation divergences
(e) when the CPI and OER indices have diverged from one another
2. The primary purpose of the passage is to
(a) evaluate methods used to measure rental inflation divergence
(b) summarize two arguments about rental inflation divergence
(c) refute an argument about rental inflation divergence
(d) reconcile conflicting arguments about rental inflation divergence
(e) reinterpret research findings about rental inflation divergence
3. According to the passage, which of the following is true of rent control units?
(a) The CPI and OER indices change to differing degrees based on the rate at which these units experience inflation.
(b) There are more rent control units in areas with a higher proportion of renters.
(c) Rent control units undergo utilities adjustments while non-rent-controlled units do not undergo such adjustments.
(d) There has only been one six-month inflation divergence episode among the inflation rates of rent controlled units.
(e) Rent control unit inflation is the primary factor influencing the OER inflation index, but is only marginally important in the CPI index.
4. According to the passage, which of the following is a key difference between inflation in the CPI index and inflation in the OER index?
(a) OER indexes are based on rents that have undergone utilities adjustments while the CPI Index is based on rents that have not undergone such adjustments.
(b) OER indexes are based on rental market segmentation while the CPI index is based on non-segmented rental markets.
(c) The inflation in the CPI Index has only experienced one divergence episode while inflation in the index for OER has undergone multiple divergence episodes.
(d) The CPI Index is meant to track rental inflation rates within metropolitan areas while the index for OER is meant to track rental inflation in rural areas.
(e) Methods for tracking inflation in the CPI Index are inferior to methods for tracking inflation in the index for OER.
close
16 Sep 2014, 01:47
