Unpopular Opinion
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It is included, but I tend to agree with your second paragraph, anyway.
What happened is that in 1983, the housing factor in CPI was changed to owner-equivalent rent. This means that it tries to calculate what a homeowner would pay if they had been renting their house instead.
The reason for this is that economists in the 1970s argued that homes are treated more like stock market investments. You hold onto it for a while, the price goes up, and then you sell it at a profit. We don't include stock market investments in inflation, so we shouldn't treat houses like that, either (so the argument goes).
I disagree that houses should be treated that way. They are durable goods you use that are necessary in your life, and require upkeep. Stocks are not. Treating them as investments has led to all sorts of problems.
In practice, this may not mean much to headline inflation. Reconstruction of the old methods (which is imperfect due to the right data no longer being collected) suggests CPI would actually be lower on average, but would also be more volitile. Homes as investments certainly has other effects, though.
Should've probably included where I'm from, that being Europe, more specifically Finland. As far as I know our index for inflation (HICP) sourced from ECB hasn't so far taken into account OOHC (owner-occupied housing cost) and has focused more on rents and other costs of living. Proposed roadmaps for changing the official indices would back this understanding, unless I'm interpreting something very incorrectly.
There's some rent controls in place in most European countries, so rents aren't tightly coupled with house prices in many locations. As such, for specific dwellings it can often be cheaper to rent than to own, since rent increases are regulated at least a bit, but cost to purchase the unit altogether is not. In many more expensive cities there's also the issue of units not being available to rent, since the rents don't directly reflect the market value of the rented unit.
Though including OOHC to the calculations will cause some difficulties when you take into account more rural areas, where the value of housing can not only go down, but actually be negative. In rural Finland there are cases where you can actually be paid to get a whole apartment complex out of someone's hands, since the costs outweigh whatever rent you can get out of the place. People are opening shell companies and selling stock in an apartment complex (a peculiarity of the local system called limited liability housing companies, or asunto-osakeyhtiö) to them at a loss, to get rid of paying for upkeep.