- [Narrator] Transportation, food, housing.
These are some of the biggest categories
in the consumer price index market basket.
One of the measures used to track inflation.
And here's how they're weighted.
You can see housing or what the BLS calls shelter
makes up about a third of the market basket
which means it can be a big factor
in either driving or tempering inflation.
- I think that shelter inflation
is gonna remain high for some time.
You know we're looking for it to come down
but it's not exactly clear when that will happen.
- [Narrator] But it's also one of the hardest numbers
to measure.
And as you can see here, it can keep rising
even when inflation in other items begins to slow down.
- That can make things complicated
for the Fed and policy makers
if they're trying to push inflation down
as they are right now.
- [Narrator] Here's why housing
is one of the trickiest items in the basket to measure
and why it holds so much weight in the overall index.
When the BLS measures for shelter
it's measuring for the service
that a housing unit provides its occupants
or more simply the cost or value of your home.
- You think of how much money you spend every month.
A big chunk of that goes to your rent or your mortgage
and that's the case for households across the country.
So if it's a big part of your monthly spending
it's gonna be a big part
of the overall inflation calculation.
- [Narrator] The index includes changes in prices
for four different categories,
but these two are the most important.
Rent and something called Owner's Equivalent Rent.
Let's look at this one first.
On the surface it's pretty self-explanatory.
It tracks prices people pay for rent.
While it's less volatile than home prices
measuring for rent poses some challenges for the BLS
because it's sticky.
That means it changes infrequently
since most prices are locked in place
throughout a lease term.
But that sticky price means the BLS has to gather data
for it differently than it does for other categories.
Data for things like food and transportation
are gathered every month or two
but it's only gathered for rent every six.
Sample areas called panels report on a staggered schedule.
So one might report prices in January and July.
While another reports in February and August.
That means that changes in rent
might not trickle into the BLS data
for months down the line.
- What the BLS is trying to do is
it's trying to capture both the people
who are in the market for a new apartment,
who are signing new leases,
and the people who are in their existing lease
who are paying the same price they were paying
the last month.
So the BLS is trying to get a picture of the overall market,
sort of every renter.
- [Narrator] According to a study by the Dallas Fed
changes in the rental market can precede changes
in the shelter index by about a year.
- We have to wait for enough people to sign new leases
or to renew their leases
for those price increases to actually show up.
- [Narrator] But this isn't even the trickiest part.
The other even bigger slice of the index
is called Owner's Equivalent Rent or OER.
This is the price an owner would pay
to rent a comparable home.
The BLS doesn't factor house prices into the CPI
so they don't show up directly in this.
That's because it considers home ownership
and investment rather than a consumable good or service,
like food or airplane tickets.
So instead, the BLS assigns owned homes and equivalent rent
based on the average rental prices in the area.
It's an estimate.
So rental prices can cause a lag
and OER can be somewhat imprecise
and you can see that that can make the shelter index
look really different from what's actually happening
in the housing market.
That can make a difference in inflation numbers
because as you can see here,
shelter is taking up an increasing share of the overall CPI.
Here's Douglas Holtz Eakin,
Former Director of the Congressional Budget Office
on the importance of bringing shelter inflation down.
- If the Fed wants to hit a 2% target
and shelter inflation is at 6%
everything else has to be zero.
That's not gonna happen.
So the Fed needs to bring down shelter price inflation
and it will increasingly raise rates
and tighten financial conditions until it does.
- [Narrator] This pressure means the shelter index's lag
can make things complicated for Fed officials.
We're looking to affect overall inflation month to month.
- The last thing they wanna see right now
is inflation going up.
I mean they've already put in place
a number of rate increases.
They have more plans, so they're really looking for signs
that inflation is coming down
and this is pushing in the opposite direction
even if it's, you know likely to be temporary.
- [Narrator] Fed Governor Christopher Waller said in October
that while housing inflation should slow,
"Increases in broader interest rates
should help moderate demand
and damp inflation in other sectors," in the meantime.
Though there isn't a specific date
that the shelter index could start to cool.
Economists expect it to start to come down
anytime between the end of the year and mid 2023
but it will keep adding to inflation
even as the housing market settles down.
(soft upbeat music)