Housing inflation has remained relatively high even as overall U.S. inflation has significantly cooled from pandemic-era peaks. Economists point to this slow decline in housing costs as the main factor preventing the consumer price index (CPI) from reaching policymakers’ targets. Housing accounts for 36% of the CPI, the largest share compared to other categories like food and energy, as it is the biggest expense for the average household. Consequently, movements in shelter prices have a significant impact on inflation readings.
The shelter inflation index measures the average cost of housing in the U.S., with its two main components being rent and “owners’ equivalent rent of residences.” Assessing changes in spending for renters, who pay monthly rent to landlords, is straightforward. However, for the majority of Americans who are homeowners, the calculation is more complex. The Bureau of Labor Statistics (BLS) considers owned housing units as investments rather than goods consumed.
Regular costs incurred by homeowners, such as mortgages, property taxes, real estate fees, most maintenance, and all improvement costs, are treated as capital costs rather than consumption expenses. These do not fit neatly into the CPI basket, which measures changes in the prices of goods and services consumed by Americans.
To level the playing field between homeowners and renters, the BLS uses the “owners’ equivalent rent” (OER) category. OER measures the value a homeowner could receive by renting out their home instead of using it themselves. Due to this methodology, the shelter inflation index tends to lag behind real-time market conditions, meaning the index is likely higher than what people are currently experiencing. Shelter inflation should continue to moderate as it aligns with trends in new rental contracts and as more rental units become available.