Owner’s Equivalent Rent (O.E.R.) is a measure of American housing inflation that has garnered a lot of criticism from economists in recent years. Some argue that it is too slow-moving and outdated to accurately reflect current economic conditions. Critics also claim that the statistical methods used to calculate O.E.R. are dubious and give a false impression of inflation levels, hindering the economy’s ability to return to normal. Mark Zandi, chief economist of Moody’s Analytics, is among those who have expressed their disdain for O.E.R., stating that it does not add anything to our understanding of inflation.
Housing inflation measures have remained stubbornly high, preventing price increases from returning to normal levels. This has led the Federal Reserve to keep interest rates at a more than two-decade high in an effort to control inflation by slowing the economy. While O.E.R. has become a central figure in America’s inflation story, not everyone believes it is to blame. Some economists argue that it is a valid and reasonable way to measure an important aspect of consumer experience.
The Consumer Price Index (CPI) and Personal Consumption Expenditures index (PCE) are the two main measures of inflation in the United States. While both are essential, the CPI focuses more on what people are buying out-of-pocket, while the PCE includes items like medical care that are paid for through employer-provided insurance. Housing plays a significant role in both indexes, but it has a larger impact on the CPI, with O.E.R. accounting for about 25% of the total index.
The government uses a two-step process to calculate housing cost inflation, taking into account rent prices and owner’s equivalent rent. Actual rental data is collected to determine how rents are increasing, and this data is used to calculate the contribution of housing inflation to the overall Consumer Price Index. Despite attempts to accurately measure housing inflation, it remains a major driver of elevated inflation levels in the United States.
Economists have been waiting for housing-fueled inflation to decrease, but the process has been slower than expected. While data shows that rent increases on newly leased properties have decreased, the overall catch-up process between new and existing rent inflation is taking longer than forecasted. Some economists are worried about signs of renewed rent strength, indicating that housing inflation might not decrease as quickly or extensively as initially anticipated.
While some economists believe that housing inflation should be overlooked as catch-up inflation, others argue that it is an essential component of measuring inflation and reflects an important economic reality. Despite criticisms of O.E.R., some economists defend its role in capturing the value of housing consumption. As the value of housing changes over time, it impacts economic decisions such as renting versus owning, highlighting the complexity and significance of housing costs in the economy.
