No One Pays ‘Owner-Equivalent Rent’
The flawed price indexes mismeasure inflation. By Readers Aug. 20, 2023 10:18 am ET A house for lease in Arlington, Va., Feb. 15. Photo: Liu Jie/Zuma Press Inflation has fallen a lot more than the flawed price indexes suggest (“The Benefit of Falling Inflation,” Review & Outlook, Aug. 11). If the fictional “owner equivalent rent” (OER) were removed from the consumer-price index, the year-over-year inflation rate falls from 3.2% to about 1.5%. The Fed’s preferred measure, the personal-consumption expenditures price index, would decline from 3% to about 2.2%. OER is the hypothetical rent you pay yourself, as if you were your own landlord. It is the most heavily weighted item in both the CPI (25.5%) and the PCE (11.2%), but it is a “price” no one pays. It has no effect on household budgets. To claim, as the CPI does, that OER is 25.5
A house for lease in Arlington, Va., Feb. 15.
Photo: Liu Jie/Zuma Press
Inflation has fallen a lot more than the flawed price indexes suggest (“The Benefit of Falling Inflation,” Review & Outlook, Aug. 11). If the fictional “owner equivalent rent” (OER) were removed from the consumer-price index, the year-over-year inflation rate falls from 3.2% to about 1.5%. The Fed’s preferred measure, the personal-consumption expenditures price index, would decline from 3% to about 2.2%.
OER is the hypothetical rent you pay yourself, as if you were your own landlord. It is the most heavily weighted item in both the CPI (25.5%) and the PCE (11.2%), but it is a “price” no one pays. It has no effect on household budgets. To claim, as the CPI does, that OER is 25.5% of average household “expenditures” is nonsense.
It attempts to measure the value, not the cost, of having a roof over your head, but an estimate of this kind belongs in gross domestic product, since it is a crucial component of the standard of living. It has no place in inflation measures. It is a mystery to me why this distinction between out-of-pocket costs and value received by homeowners is too difficult for many experts to grasp.
Em. Prof. Robert F. Stauffer
Roanoke College
Salem, Va.
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