It's the consumer price index. Rent is consumed. A house is an asset. You can sell it at a profit. Your intuition is correct in that it's not quite that simple in the real world. Housing is already the least liquid asset, and people get an emotional attachment to their homes, so they often die without cashing out on their homes. As a result, they feel poorer than they should as suggested by CPI.

IMO, the problem isn't the CPI. The market is just fundamentally distorted because the government pumps money into real estate into subsidized loans.