Why the Fed Is So Focused on Rent: Key Insights
Rents are a significant hurdle for the US Federal Reserve in achieving its 2% inflation target. Rent inflation, as measured by the Consumer Price Index (CPI), has not moderated as quickly as other inflation indicators, largely due to the complexities of a CPI component called owners' equivalent rent (OER).
How Rent is Measured in the CPI:
The CPI includes two types of rent:
Rent of Primary Residence - costs for tenant-occupied housing.
Owners' Equivalent Rent (OER) - hypothetical rent for owner-occupied properties.
Together, these rent measures account for over a third of the CPI, making them crucial in determining overall inflation.
OER Calculation:
OER's weight in the CPI is determined by a Census Bureau survey, asking homeowners their property's rental value. Price changes are based on actual rents for similar properties. Divergences can occur due to differences in property types and adjustments for utility costs.
Tracking Market Rents:
Real estate websites like Zillow and Apartment List provide monthly market rent data. The Bureau of Labor Statistics (BLS) also publishes a New Tenant Rent Index. These indices often show more immediate rent changes compared to the CPI.
OER's Impact on Inflation:
OER has been slower to decline, contributing to higher-than-expected inflation figures. This has delayed the Fed's plans to cut interest rates, as Fed Chair Jay Powell highlighted the lag between different rent measures.
Outlook:
Forecasters expect rent inflation to moderate, potentially allowing the Fed to reduce interest rates later in 2024. However, the exact timing is uncertain due to the methodological quirks of the OER calculation.
Executive Summary:
Rents, measured by the CPI's rent of primary residence and owners' equivalent rent (OER), are key to US inflation. OER's slow decline has kept inflation high, delaying Fed rate cuts. Market indicators suggest rent inflation will moderate, but the timing remains uncertain.
*Credit Bloomberg
