Why the Fed Is So Obsessed With Rent

Rents are the biggest remaining obstacle for the US Federal Reserve in bringing inflation back down to its 2% target. That is, rents as measured in the consumer price index, a key yardstick for the Fed. But other measures meant to give more up-to-date data show rental inflation has moderated more quickly than the CPI indicates. Much of the divergence is driven by the methodological quirks of a CPI component known as owners’ equivalent rent, or OER. Because rents make up an outsize share of the CPI, higher-than-expected OER readings earlier this year have led Fed officials to suggest they will hold off longer than originally planned before reducing interest rates they hiked steeply in 2022 and 2023 to fight inflation.

Fed Chair Jerome Powell on June 12 said “it may take several years” for pandemic-era rent increases to work their way into the CPI. Data from May published earlier in the day showed another month of elevated OER readings, though analysts pointed to outliers boosting the numbers that should reverse in the next report.