Researchers at the Cleveland Fed looked at the trend of stubbornly high ‘owner’s equivalent rent’ and concluded that it will likely continue to add to inflation numbers.
OER captures the implicit rent that a homeowner would have to pay if he or she were to rent instead of own the same home and is a large part of the CPI weighting. The study struggles to explain the recent rise in rents and says the only good predictor of future rent increases is lagged home price appreciation:
OER inflation does not appear to be influenced by vacancy rates, unemployment rates, the real interest rate, or our gap measure. Of the variables investigated, only lagged house price appreciation appears to have a statistically significant relationship to OER inflation (previous OER inflation is also statistically significant). In one sense, this is a conundrum, because it suggests that we “cannot explain” OER inflation using the “usual suspects.”
They say OER inflation is likely to slow somewhat in the Northeast, rise to about 3 percent in the South, remain at about 2.9 percent in the West, and rebound to about 2 percent in the Midwest.
For me, it’s another example of how little we understand inflation and that’s a warning to economists and traders who have grown extremely complacent.
