In 1996, the Boskin Commission made recommendations that led to a major reconfiguration of how the CPI is calculated. Principal among these was the substitution of rent for the combination of rent and mortgage costs to make up the housing component in the CPI. As the housing component comprises 40% of the inflation number, this one calculation carries incredible significance.

Over the past five (or more) years, a great number of Americans have been able to swap rental housing for home ownership, the result of declining mortgage interest rates. Side effects of this switch have been to drive home prices higher and rents lower - pure supply and demand. As a secondary consequence of lower relative rent costs, the housing component of the CPI has declined (or risen far more slowly than the actual cost of housing). This is a principal reason that many observers have claimed the CPI has underestimated the real costs of inflation.

With mortgage rates now on the rise, more people will turn to renting. Rents should be expected to rise (and home price increases expected to slow or reverse). As a consequence of rising rents, the CPI will rise faster than the actual cost of housing.

Perhaps this clear miscalculation of housing cost explains why the Fed prefers the PCE (Personal Consumption Expenditure) as an inflation measure to the CPI.