Has the US Bureau of Labour Statistics given the Fed a reason to delay monetary easing?

Bureau for Labour Statistics forced to issue a statement

The US Bureau of Labour Statistics (BLS) yesterday took the unusual step of issuing a short press release that tried to explain the reason for the unexpected jump in owners’ equivalent rents (OERs) reported in January’s CPI numbers. OERs in January jumped by 0.56%, the biggest increase seen since April 2023, and significantly higher than the 0.36% rise recorded for primary rents, which posted their smallest rise since August 2021. This jump in OERs was the primary reason for both headline and core CPI printing more strongly than expected over the month. Clearly this unexplained divergence between OERs and primary rents concerned the market and the BLS has subsequently felt the need to address them via yesterday's statement, which simply said that (when calculating OERs) “the weights used for single-family detached homes had increased materially from December 2023 to January 2024”, adding that “no further information on the issue would be provided.”

What are owner-equivalent rents?

OERs are what the BLS calculates would be the rental value of owner-occupied single housing units. Using a sample of properties, it works out the average value of the primary rents paid in that sample (ie actual rents paid by actual tenants). To this figure, it then makes an estimate of the cost of utilities contained in that primary rent number and removes it (as utility bills paid by homeowners are measured separately in the CPI figures). However, the BLS is also required to make an adjustment to the sample of properties it uses as approximately two-thirds of people renting in the US do so in multi-family units (e.g. properties such as apartment complexes where two or more families live separately but share communal costs such as building maintenance), as opposed to about only 5% of owner-occupiers, and multi-family units typically attract lower rents than single-family units. Accordingly, it needs to account for the contribution made to its primary rent figure from these multi-family units when calculating OERs.

Small sample size presented problems

The BLS claims to have 50,000 housing units in its primary rents sample, with each unit sampled every six months. This means that for any given month, a maximum of around 8,000 units are sampled (probably less). And within this sample, the number of single family detached units – used for calculating OERs - is even smaller, probably less than a quarter. Effectively this means that only a small proportion of the properties sampled each month when calculating primary rents would be suitable for being used to calculate OERs. Given the rental premium single family units attract, it appears the BLS considered this sample size to be too small and was underestimating the true value of OERs when calculating inflationary pressures in the US, and has tried to address this issue by increasing the weight attached to single-family homes used in its sample.

The created discontinuity in the data will persist until July

Clearly, if you change the characteristics of your sample pool – in this case the weight attached to single-family housing units – then you will introduce a discontinuity in your data. And given the rental premium on single-family homes then it means your level of calculated OER will rise in the month you make the change. And this is exactly what we have seen. Assuming that the BLS continues with this change – and there is no reason to suggest they will not – then given that properties are sampled every six months, it suggests that OERs will also come in stronger in the February to June figures too. Accordingly, this elevated estimate of OERs will continue until June, before falling back again.

Potential exists for upwards pressure on wages settlements

The implications of this are that both the CPI and PCE calculations over H1 will be stronger than previously expected, which is exactly what we saw with the January CPI release. The Fed will be aware of this and may choose to discount these temporary higher prints as the statistical anomaly they are, rather than an actual increase in underlying inflationary pressures. But it is the message that the - albeit temporary - higher CPI prints send out that matters, namely how US workers and consumers react to them. Until July they will see an elevated level of CPI, risking inflation expectations being revised upwards and potentially putting upwards pressure on wages settlements over H1.

Interest rate cuts could potentially be delayed until at least August

As noted above, while this increase in OERs and the boost it provides to the overall calculation of CPI is a statistical anomaly, potentially it could be enough to give the Fed another reason to delay any monetary easing until H2.