Owners' Equivalent Rent (OER) inflation likely to remain elevated, say Cleveland Fed researchers

Recently, the inflation rate has been rising, owing partly to inflation in Owners’ Equivalent Rent (OER), which is at levels not seen since 2009. Is the increase in OER a temporary blip? Not according to Federal Reserve Bank of Cleveland researchers Randal Verbrugge and Amy Higgins, who say that OER inflation is likely to remain elevated over the next year.

OER is used to estimate inflation in homeowner housing costs; the OER of a particular home is the rent that the home would command under current market conditions. OER accounts for roughly 25 percent of the CPI and 12 percent of the PCE price index, the preferred inflation indicator of the Federal Open Market Committee.

To estimate where OER inflation rates are headed, Verbrugge and Higgins  constructed a forecasting model using variables that might be expected to affect rent inflation: vacancy rates, unemployment rates, house price changes, and interest rates. They found that only lagged house appreciation – and recent OER inflation – are useful predictors of future OER inflation.

Read Recent Owners' Equivalent Rent Inflation Is Probably Not a Blip.

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