Federal Reserve Bank of Cleveland Creates New Rent Index to Help Guide Monetary Policy

Read Time: 
2 min
Posted by 
As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
January 9, 2023

Housing is one of the most important expenses for American households and because of that, it makes up about one third of the Consumer Price Index (CPI). That means measuring housing costs is highly critical for measuring inflation.

That is why the Bureau of Labor Statistics (BLS) is highly comprehensive and thorough in how it measures rent prices in the US. The BLS essentially takes a massive, nationwide, rolling sample of housing units, splits them into panels, and then surveys each panel once every six months.

Data on rents are collected and adjusted for things like building age, renovations, amenities, and utilities to construct an index of rent prices. Local samples of rental units are then used to construct a comparable price index for homeowners (called owner’s equivalent rent or OER), and now BLS can calculate accurate housing price changes across the United States.

There is one problem with this data, however—it lags economic conditions significantly.

In a new working paper put out by the Federal Reserve Bank of Cleveland “Disentangling Rent Index Differences: Data, Methods, and Scope” they say that “prominent rent growth indices often give strikingly different measurements of rent inflation. We create new indices from Bureau of Labor Statistics (BLS) rent microdata using a repeat-rent index methodology and show that this discrepancy is almost entirely explained by differences in rent growth for new tenants relative to the average rent growth for all tenants. Rent inflation for new tenants leads the official BLS rent inflation by four quarters. As rent is the largest component of the consumer price index, this has implications for our understanding of aggregate inflation dynamics and guiding monetary policy.”

There are two very important things to note with this new shelter tracking index. The first is that it leads OER by four quarters, giving policy makers a more current data point, and secondly it gives a more wholistic gauge of real time rent prices when compared to indices like the Zillow Observed Rent Index and ApartmentList Median New Lease Index.

As we exit a time of extreme policy shifts by the Fed (2020 and 2022) more current data should help to give them a better idea on how to respond to future events.

About us
Fjell Capital is a leading wealth management firm designed to deliver results for people who desire to be excellent with their finances. Starting at $125/month and a 0.75% asset management fee you can work with Fjell Capital. No asset minimums. Learn more about Fjell Capital here.
Subscribe to the Weekend Reads
Received, interested in becoming a client?
Thank you! Your submission has been received!
Something went wrong!
Email Us
Top posts
recent posts
Schedule a 15-minute Call
Our clients enjoy unbiased advice and a low monthly fee. Schedule your free consultation today.
Choose a Time
COntact us

How can we serve you?

How can we serve you? We invite you to contact us today so we can help answer any questions you may have about your financial situation.

Left pointing blue arrow.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
©2022 Fjell Capital. All Rights Reserved.

-------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------