Several contributors to the Wall Street Journal's always interesting round-up of expert opinion took special note of the continuing contribution of owners' equivalent rent (OER) to the recent string of less-than-delightful CPI inflation reports. High Frequency Economics' Ian Shephardson gives as nice an explanation about what it's all about since -- well, since the Cleveland Fed discussed it in this month's Economic Trends. Explains Mr. Shephardson:
OER is being pushed up by a combination of falling rental vacancy rates and increased demand for rentals as rising short rates price people out of the home buying market. OER is also probably being pushed up by a technical quirk; it rises relative to primary rents when utility costs slow -- they have fallen for four straight months.
And why do we care?
The core was driven higher by a huge 0.6% jump in owners' equivalent rent, the biggest increase in 16 years... --Ian Shepherdson, High Frequency Economics...
Much of the recent acceleration in core inflation has been due to rapidly rising owners' equivalent rent, which in turn has been boosted by the slowing housing market … --Steven A. Wood, Insight Economics...
The rising rent dynamic that we have discussed for a while has now pushed core CPI prices up by 0.3% for two consecutive months and could continue to do so for a few more months. The core inflation numbers, therefore, are unlikely to look favorable for some time given the sticky nature of this dynamic...--Bears Stearns U.S. Economics
Some clearly view this as much ado about -- I guess something about which there should be less ado. Again from Mr. Shephardson...
Ex-OER, core CPI rose only 0.1%. The story is one of a relative increase in rents; monetary policy is the wrong tool to deal with this.
... and from BNP Paribus Market Economics:
Excluding shelter costs, however, core CPI is scant sign of the acceleration that the Fed is finding "unwelcome." The Fed's silence on its attitude to the role that rental inflation is playing in generating this year's pick is both baffling and increasingly embarrassing ...
But our friend Barry Ritholtz warns...
While we can all agree that OER has understated inflation for about a decade, it is way premature to suggest that it is now overstating it. At worst, it is merely catching up with where it should be.
... and, in my opinion, Stephen Stanley, of RBS Greenwhich Capital, nails it...
Increases in OER can not be easily dismissed. In any case, it is pretty silly to exclude nearly 40% of the core. And even if we do, the 3-month annualized change for the core excluding rent and OER was still 2.9%, a clear acceleration from prior trends …
... with an assist from Morgan Stanley Fixed Economics:
The core PCE data released over the next couple of months might not show quite as much acceleration [as CPI numbers] -- because shelter has a much smaller weight -- but it is still likely to display some upward drift.
As, indeed, it already has. I'm looking at the data, and, positive spin is hard to come by.
UPDATE: Steve Cecchetti adds this:
... I firmly believe that some measure of the cost of owner-occupied housing belongs in the price index used for monetary policy purposes. We should not just get rid of it. Furthermore, looking at these data, there are two choices: Either the OER distorts the CPI, or it doesn't. If it does, then along with claiming that measured inflation is currently too high, you have to accept that measured inflation from 2001 to 2004 was too low. That is, there was never a deflation scare. Instead, policy was much too loose following the end of the 2001 recession. That's what I think, but I doubt that Chairman Bernanke does.