Financial markets were rattled last week when a report showed inflation stayed more stubborn than forecasters had expected. Despite the setback, most economists, and officials at the Federal Reserve, remain convinced inflation is headed down, not up, in the coming months. 

What makes them so sure?

The answer lies with a formerly obscure statistic called Owners’ Equivalent Rent (OER). It’s one of the ways that the government’s Consumer Price Index (CPI), a widely watched measure of inflation, computes changes in housing costs. 

Because rent and home ownership are such huge parts of household budgets, changes in the OER massively influence the overall cost of living as shown by the CPI. And one of the odd things about OER is that it lags about a year behind other measures of rent, such as Zillow Inc.’s Observed Rent Index for single-family homes.

As shown in Zillow’s rent index, rents spiked during the pandemic as demand for housing surged. It took a year for those rapid increases to work their way through to the official government data. Now, the same is true for the cooling trend of rent increases since 2022, and the OER should start dragging inflation readings down instead of pushing them up.

This delay is among the reasons some prominent housing economists are calling on the government to change the way it measures housing costs.

For most consumer items in the CPI, the government uses a fairly straightforward method of checking actual prices at stores around the country. But for housing inflation, the Bureau of Labor Statistics surveys homeowners, asking them how much they would rent their house out for if they rented it out instead of living there, in addition to measuring actual rents.

If that sounds unreliable to you, you’re in good company: A panel of three housing economists at the National Association for Business Economics last week agreed that the OER could use an upgrade.

Sam Khater, chief economist at mortgage giant Freddie Mac, said the government could use a much simpler method. Because most mortgages in the country are backstopped by the government-sponsored enterprises Fannie Mae and Freddie Mac, the government already knows how much millions of people actually pay for their mortgages each month, and could just use that data to calculate housing inflation.

“The OER is attempting to get to what a typical consumer is paying for their shelter, their monthly obligation,” Khater said. “It’s a simple way, and at least one that the government should be tracking.”