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.
And for all things inflation, check out Inflation Central.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479