We Are Still Measuring Inflation All Wrong (Alan Reynolds, 2/26/24, Cato)
Owners’ equivalent rent purports to measure monthly variations in a price nobody pays, and to average those estimates for every house in the entire country. Nearly every other country wisely excludes such impossibly arbitrary OER estimates from their measure of inflation. Yet that singular made‐up number dominates the US CPI, and to a lesser extent the Personal Consumption Expenditures (PCE) inflation index too.
Shelter accounts for 36.1 percent of the CPI and 42 percent of Core CPI. Shelter also accounts for 60 percent of measured inflation in non‐energy services. This turns out to matter quite a lot, because estimated inflation for shelter has long been extremely high, while inflation for everything else has been extremely low.
The Graph shows that from July 2022 to January 2024, the average CPI inflation rate for shelter was 7 percent, yet the average inflation rate for everything else was only 1.2 percent. This January alone, the reported annual inflation rate for shelter was 6.9 percent, but inflation for everything else was 1.6 percent.