In recent months, U.S. inflation has surged, posting its largest gains in decades. In tandem with the jump in overall inflation, owner equivalent rents (OER) have begun to gradually accelerate. This has triggered concerns that the rise in OER might gain steam and further fuel inflation pressures. Such concerns are particularly acute given the sharp parallel rise in house prices and the large weight of housing in the price indexes.
Housing Inflation—Gauging the Upside Risks tackles these issues head on. We look at the recent evolution of housing inflation, consider its underlying drivers and its relationship to house prices, formulate projections for where it may be headed, and then assess the implications for the inflation outlook more broadly.
We find that housing inflation is unlikely to exceed 4.5% during the next year or two. This suggests housing could contribute roughly 75 basis points to core PCE inflation, which is about 15 basis points higher than its pre-pandemic contribution. This would be significant, but hardly a game changer for the overall inflation picture.