How the shelter component of the CPI is impacting inflation measures

An important factor behind recent inflation readings has been an upward trend in inflation in the shelter component of the CPI, according to Federal Reserve Bank of Cleveland researchers Edward Knotek II and William Bednar. More specifically, they point to a run-up coming from owners' equivalent rent of residences (OER), which has been at its highest levels since the beginning of 2008. OER accounts for nearly one-fourth of the total CPI basket and 31 percent of the core CPI index, though it is far less important for PCE-based inflation measures.

How does this recent upward trend in OER inflation affect alternative measures of underlying inflation, such as the Cleveland Fed’s median CPI?  Knotek and Bednar say year-over-year inflation in the median CPI in January, at 2.0 percent, was little changed from where it has been through most of 2012 and 2013. So the upward trend in OER inflation has not pushed up the median CPI, which the researchers say is a bit surprising.

Because both the core CPI and the median CPI are heavily influenced by OER, the researchers looked at what would happen if they removed the four regional OER subindexes that are used in calculating the median CPI. They found that inflation in the median CPI excluding OER peaked in early 2012 and has been on a downward trend since then.

In January, the median CPI excluding OER was 1.6 percent, significantly lower than the normal median CPI inflation measure but virtually identical to core CPI inflation. The researchers note that the last few median-CPI-excluding-OER readings have leveled off, but say it’s too early to call this a new trend.

Read What’s Up in Inflation? Shelter and OER

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