There is a three-letter abbreviation that economists have begun to pronounce with the energy of a four-letter word: “REA.”

It represents rent equivalent to the owner and has been used to measure housing inflation in the United States since the 1980s. As its name suggests, it uses a combination of surveys and market data to estimate how much it would cost landlords to rent the property. house in which they live.

But three years after rising U.S. prices, it has become almost a cliché for economists to hate the housing measure. Detractors criticize it for being so slow that it does not reflect up-to-date conditions in the economy. Critics argue that it uses complicated statistical methods that make little sense. The most intense haters insist that a false impression is being given about where is the inflation.

“It just adds nothing to our understanding of inflation,” said Mark Zandi, chief economist at Moody’s Analytics and a frequent adviser to the Biden administration. Full disclosure: The New York Times called Mr. Zandi for this article because he has been one of many economists complaining about OER on social media. He said he was “not a fan.”

What has this nerdy component of inflation done to generate so much vitriol?

It is preventing, more or less, a happy economic ending. Housing inflation measures have been surprisingly sticky over the past year and are now a major barrier preventing overall price increases from returning to normal. This has knock-on effects: Because of the staying power of inflation, the Federal Reserve is keeping interest rates at a more than two-decade high to try to control prices by slowing the economy.

But while there is no denying that OER has become a major character in America’s inflationary story, not everyone thinks it is the bad guy. Some economists believe it is a valid and reasonable way to measure an important part of the consumer experience. Before a new Consumer Price Index report is released on Wednesday morning, there are some key facts we need to understand about how housing inflation is calculated, what it means, and what it might do next.

OER attempts to measure the “consumer value” of the home.

Let’s start with the basics. There are two main measures of inflation in the United States, the consumer price index and the personal consumption expenditures index. Both matter: the CPI is published at the beginning of each month, providing the first snapshot of how prices have evolved over the past month. The PCE comes later, but it is the index that Federal Reserve officials are targeting with their 2 percent inflation target.

The two indices follow slightly different concepts. The Consumer Price Index attempts to capture what people buy out of pocket (i.e., what they are spending), while the Personal Consumption Expenditure measure captures the cost of things like health care or insurance provided by the employer helps pay (i.e. what you are consuming).

Both are based on the same underlying housing data, but because of their different calculations, housing makes up a much larger portion of the Consumer Price Index: about 33 percent, versus about 15 percent of the PCE.

The considerable real estate sector share of the CPI comes from two sources. “Principal residence rent” measures how much people spend on rental housing and accounts for about 8 percent of the total inflation rate. The “owner equivalent rent” metric, which estimates the cost of renting home ownership, represents a much higher 25 percent.

You may be thinking: Why is the government using this complicated measure of housing when it would be easier to simply measure home price appreciation? The answer is that houses are an investment. Counting their price increases as “inflation” would be like saying that a rising stock market is “inflation.”

But houses are not just an investment. Housing is also something we consume, and by living in a house, the owner is giving up the financial opportunity of renting it. So to calculate the “consumption value” of owning that house, the government tries to calculate how much it would cost to rent it.

The way we calculate rent is a little confusing.

The government uses what is essentially a two-step process to determine housing cost inflation. Step 1: Calculate how much weight rent and landlord equivalent rent should have in the inflation index versus everything else consumers buy. Step 2: Calculate how much rents are actually increasing.

Step 1, weight, is based on two survey questions: If you are a landlord, how much could you get if you rented your house or apartment? And if you rent, how much do you pay?

Step 2, the price change, is based on actual rental data. The government collects data from a rolling sample of rental housing units and monitors each unit every six months to see if the landlord is charging more. (Make adjustments to these figures: for example, single-family homes are weighted more heavily in the owner-equivalent measure, since home ownership is more likely to be a house than an apartment.)

Combine the peso with the price change and bam, you have your housing contribution to inflation. With housing, Consumer Price Index inflation rose to 3.4 percent in April. If you subtract housing and reweight the index accordingly, inflation would have been something like 2.3 percent.

Clearly, housing inflation is one of the main reasons why inflation remains high.

We’re still waiting… and waiting… for more cooling.

Economists have been expecting housing-driven inflation to fade more sharply. Market data from companies like Zillow and new rental data from the government show that rent increases in newly rented places have cooled sharply over the past two years.

But inflation rates measure all housing, not just new rented housing. When market rent prices rose in 2021, not all tenants immediately saw their rents reset to higher levels: Landlords have gradually reset leases at higher prices, causing that previous increase to go away slowly reflecting in official housing inflation data.

Forecasters thought the recovery process would peter out in 2023 and 2024, allowing housing costs and overall inflation to decline noticeably. But the convergence between new and existing rent inflation is taking much longer than expected.

Economists still expect the transfer to occur, but have become less confident about how quickly it will happen and its extent. And some are watching nervously as some measures of new apartment rents show signs of rising again. A rent gauge tracked by research firm Zelman & Associates is also showing early signs of renewed strength.

“If you had asked me six months ago, I would have said, ‘Yes, they’re going to have to converge,'” said Mark Franceski, CEO of Zelman. “Every month that’s passed and they haven’t done it, I’ve become less confident.”

So do OER have a place in inflation?

Because the current housing inflation is essentially catch-up inflation, some economists think we should ignore it. In Europe, some point out, the main measure of inflation completely excludes owner-occupied housing.

But while the measure receives a lot of heat for being “fake” either “inflationary”, or based on the frequent (but incorrect) affirmation which comes from a dubious survey, some economists maintain it.

“Let me break with the young people and defend OER,” said Ernie Tedeschi, who until recently was chief economist of the White House Council of Economic Advisers. For one thing, it’s important to maintain the inflation metric you started with, he said. Moving the targets could undermine public confidence in the Federal Reserve’s commitment to fighting inflation.

Tedeschi also stressed that OER tries to get at an important idea. As home values ​​change over time, it shapes our economic lives.

If a homeowner moved and needed to rent, doing so would be more expensive, for example. (Europe, for what it’s worth, is working on developing its own measure of owner-occupied housing costs expressly because it’s a major component of inflation.)

Just as hard-to-measure forces in physics are critical to the way the universe works, Tedeschi said, the value we derive from where we live is enormously important to the functioning of the economy, even if it is complicated.

“OER are kind of the dark matter of economics,” he said.