[I used to write about "owners' equivalent rent" and how it distorts the inflation statistics on a weekly basis a few years ago. Here's a piece from June 15th, 2006, back before it became common knowledge that the Fed had been duped by this measures of the cost of home ownership. BTW - I'm still up there pretty high on a Google Search of the term.]
The ongoing debate about the significance of owner’s equivalent rent within the consumer price index is yet another example of how hapless the nation’s dismal scientists are as they continue to formulate monetary policy based on flawed measures of “inflation”.
As you’ll recall, most economists restrict the usage of the word “inflation” to mean “core inflation”, which excludes things like energy and food, and since 1983 has utilized Owner’s Equivalent Rent (OER) in lieu of actual costs of home ownership.
To determine OER, instead of measuring what homeowner’s costs actually are – items such as principle, interest, taxes, insurance, upkeep, etc. – the Bureau of Labor Statistics asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
So, “core inflation” today is made up of about 38 percent housing rental costs – 30 percent OER and another 8 percent reflecting the prices paid by people who actually rent.
If you’re a central banker in an Anglo Saxon country this is a great deal because you can have home prices skyrocket and these costs don’t show up in the consumer price indices. High home prices boost the economy in many ways – many new mortgage lending and construction jobs are created and consumption increases dramatically through easy home equity withdrawal – but they don’t hurt the banker’s bottom line of price stability.