by Calculated Risk on 3/21/2024 12:57:00 PM

A brief excerpt from a BofA research note.

BofA economists ask: Should policy be set on OER if nobody pays it?

One main factor behind sticky services inflation in the US has been the behavior of owners’ equivalent rent (OER), which measures the change in the cost of owner occupied housing. ... The Bureau of Labor Statistics (BLS) estimates OER by using actual rents as a proxy. Rents, which initially plunged during the pandemic, rebounded sharply for several reasons. These include a shift in demand from urban to rural locations where inventory was scarce, an increased desire to live alone, and a need for increased space to accommodate work-from-home arrangements.

That being said, we ask the following provocative question: should monetary policy be based on a price that two out of three households are not paying. ... The Harmonized Index of Consumer Prices (HIPC) [that] was created to mimic how inflation is estimated in Europe, which excludes OER from its price index due to disagreement over how to estimate owner-occupied housing costs. While headline CPI inflation was up 3.2% y/y through February and headline PCE inflation was up 2.4% through January (February data has not been released yet), where was HICP inflation? HICP inflation was up only 2.2%.

Where would the Fed’s confidence to cut be if it saw inflation at 2.2%? We think most certainly higher.

I've written extensively about the surge in household formation during the pandemic (mostly due to work from home), how and why asking rents are mostly flat year-over-year, and why I think OER should mostly be ignored right now by the Fed (monetary policy cannot impact the past).

With the February CPI report, I noted: "Rent and Owner's equivalent rent are still very high, and if we exclude rent, median CPI would be around 1.8% year-over-year." Core CPI ex-shelter was up 2.2% YoY in February, unchanged from 2.2% in January.