The Bad Joke of Owners Equivalent of Rent (OER) explained.

By Wolf Richter for WOLF STREET.

The Consumer Price index for February, released today — which does not yet include the gasoline price spike in March — rose by 0.27% (+3.3% annualized) in February from January (blue line in the chart).

The year-over-year increase – which is still, and will continue to be, pushed down by the doctored figures for Owners’ Equivalent of Rent (OER) for September, October, and November (more in a moment) – rose by 2.4%, same increase as in the prior month (red line). OER accounts for 26.1% of total CPI, it moves the needle, and it’s a scandal, a politically-convenient and Wall-Street-convenient scandal, so everyone over there is going along with it.

The energy CPI jumped by 0.63% in February from January (+7.9% annualized). Gasoline prices jumped in February from January, even on a seasonally adjusted basis. The price of utility natural gas piped to the home spiked, as did prices of other fuels used at home, largely propane, heating oil, and firewood, amid a harsh winter in parts of the country. Electricity prices backed off for the second month from the spike that had topped in December.

Year-over-year, the energy CPI was up just a hair thanks to the 5.6% YoY drop in gasoline prices that is now in the process of flipping.

Food prices jumped by 0.63% in February from January (+7.9% annualized). Year-over-year, food inflation accelerated to 2.6%. Food prices are up by 31% from January 2020.

But prices of durable goods, many of which are imported, fell for the third month in a row and were nearly flat for two months before then. So year-over-year, the CPI for durable goods is now essentially unchanged, despite the tariffs. Durable goods are dominated by new and used vehicles.

Core services CPI rose by 0.27% (+3.3% annualized) in February from January, a deceleration from what had been the worst reading in a year. It accounts for roughly 60% of the CPI basket of goods and services.

It includes housing costs (OER and Rent), medical care services, health insurance, auto insurance, tenant’s insurance, subscriptions; telephone, internet, and wireless services; lodging, rental cars, airline fares, education, movies, sports events, club memberships, water, sewer, trash collection, motor vehicle maintenance and repair, etc. It does not include energy services, such as electricity.

Year-over-year, the services CPI rose by 2.9%, as it continues to be pushed down by the CPI for Owners’ Equivalent of Rent (OER), which had been doctored for the September-November period. OER is the biggest component of the CPI basket, weighing 26.1% in overall CPI, and over 40% in core services CPI, and it moves the needle.

The Bad-Joke OER explained.

The Owners’ Equivalent of Rent CPI rose by 0.22% (+2.7% annualized) in February from January.

The issue here is the year-over-year increase that is still getting pushed down by the three doctored months September-November. Year-over-year, the index rose by 3.2%.

OER is based on what a large group of homeowners estimates their home would rent for. It’s supposed to reflect the cost of homeownership as a service.

Homeowners experience a lot more inflation, but it is not reflected in CPI. The expenses of homeownership – homeowners’ insurance, HOA fees, property taxes, and repairs & maintenance – are not included in CPI, and OER takes their place. Those expenses have soared for many homeowners, and inflation is rampant in them, but not reflected in OER.

Many countries, including Canada, track homeowner inflation by the actual costs they pay for homeowners’ insurance, HOA fees, maintenance and repairs, and property taxes. Canada includes an index for mortgage rates and an index for home replacement values. Why can’t the US switch to a system like this? That’s a conceptual shortcoming with OER, it’s a lazy way of bypassing a more complex job – and always has been.

The immediate issue with OER is September, October, and November. In September, the month-to-month increase of OER did a suspicious outlier-plunge, and with no data for October due to the government shutdown and apparently no data for November either, the September outlier was carried forward through November. Since then, the month-to-month increases seem normal, given what OER represents.

But the year-over-year increase is still getting pushed down by those artificially low readings in these three months (circled in blue).

What is getting pushed down by those three months is the index value. It was 430.5 in August. In the four months through August, the index value increased by 1.18 to 1.44 points each month. Then in September there was this outlier when the index value increased by only 0.68 points, roughly half the prior rate. October was officially left blank, but the index value for November is there (432.5), and so we know that in effect, they carried the outlier monthly increase in points (0.68) from September forward to October and November, and combined the two increases averaged out to be 0.70 per month, the excuse being the government shutdown and lack of actual data.

The table shows the OER index value, seasonally adjusted; the changes month-to-month in points and percentages; and the changes year-over-year (not seasonally adjusted) in percentages. Note how the year-over-year increases plunged from +4.0% in August to +3.4% in November.

The index values of these three months that barely increased carry forward in the index value for all times to come. But next fall, they will fall out of the 12-month window of the year-over-year percentage comparison, which is when the year-over-year impact of those three months will vanish.

	OER index value	MoM change in pts	MoM %	YoY %
Jan/2025	421.1	1.30	0.31%	4.6%
Feb/2025	422.4	1.27	0.30%	4.4%
Mar/2025	423.9	1.56	0.37%	4.4%
Apr/2025	425.3	1.42	0.33%	4.3%
May/2025	426.5	1.19	0.28%	4.2%
Jun/2025	427.8	1.30	0.31%	4.2%
Jul/2025	429.0	1.18	0.28%	4.1%
Aug/2025	430.5	1.44	0.34%	4.0%
Sep/2025	431.1	0.68	0.16%	3.8%
Oct/2025	431.8	0.70	0.16%	3.6%
Nov/2025	432.5	0.70	0.16%	3.4%
Dec/2025	433.9	1.36	0.31%	3.4%
Jan/2026	434.8	0.95	0.22%	3.3%
Feb/2026	435.8	0.98	0.22%	3.2%

IF OER index values had increased in September through November at the average rate of the months June, July, and August, year-over-year OER today would be +3.6%, not +3.2%.

The CPI for Rent of Primary Residence is dogged by a similar issue, but to a lesser extent. It weighs 7.8% in overall CPI. Together, the two indices weigh over one-third of total CPI!

The core services CPI rose by 0.22% (+2.7% annualized) in February from January. Year-over-year, the OER issue continued to push down core services CPI to an increase of 2.9%.

“Core” CPI, which excludes food and energy components to track underlying inflation, rose 0.22% (+2.60% annualized) in February (blue in the chart below).

Year-over-year, “core” CPI rose +2.5%, also pushed down by the months of the doctored OER (red):

Later today and over the next few days, I will post separate detailed analyses on food inflation, which intensified; and energy inflation, which also intensified even before the current price spike in March; and on inflation for owners and buyers of cars and trucks. So stay tuned.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: