Read It Here First: Owners' Equivalent Rent and Inflation

Monday, May 22, 2006 | 11:45 AM

Over the weekend, we discussed  the various "shills and montebanks are coming out of the woodwork to proclaim -- once again -- that there is no inflation, due to OER."

Today's WSJ looks at that exact issue, and to Justin Lahart's credit, avoids the trap:

Oer_20060521171210 "In other words, a hot housing market perversely depressed official inflation measures, and now a cooling housing market is pushing those measures up. Some bond investors are prepared to dismiss the statistical gymnastics. But Barclays economist Dean Maki says that would be a mistake. Price figures are simply getting back to normal after being unnaturally low for a long time, he says.

"It would be somewhat disingenuous for policymakers to strip out owners' equivalent rent now, when they weren't stripping it out before when it was keeping core inflation low," he says."

Disingenuous is certainly the right word for it, and kudos to Dean Maki for recognizing that.

Incidentally, the OER still understates inflation, as the chart at right reveals. 

In related news, after the third consecutive weak monthly LEI, the Conference Board has announced yet another change to the leading indicators. The latest adjustment? Any item showing a negative number on a given month will be multiplied by "minus one" to change the coefficeint to a positive number. A spokesman announced that "this will help keep the LEIs  as completely useless as possible."


Gimme Shelter
Justin Lahart   
WSJ, May 22, 2006; Page C1

Monday, May 22, 2006 | 11:45 AM | Permalink | Comments (19) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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I guess since the Fed raising short term rates has caused equivalent rents to rise, the Fed should start lowering rates to stop inflation if we are using equivalent rates to measure it.

Raising short term rates causes people to rent because housing becomes even more unaffordable which puts even more downward pressure on the economy. That causes more demand for rentals and as we know rising demand causes higher prices. So, we should expect that as long as the Fed continues to raise rates, we will see inflation increase as measured by equivalent rents. So, then when does it stop? When no one can afford a house or afford to rent because both have exceeded the tipping point. So, we can expect the Fed to stop when we see people living under the highway bypass. ie, According to this measure, only when the Fed has totally killed the consumer and driven us into a deep recession.

Just call me Mr. Shill.

Posted by: B | May 22, 2006 12:07:06 PM

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