Nomura On BLS OER Methodology Impact

Nomura question the BLS’s update from yesterday that the acceleration in OER inflation in January was down to the weighting toward single-family-detached homes increasing by ~5%, following a confusing couple of days for BLS communications.

• “If the acceleration in OER inflation was entirely due to the methodological changes, it could have important implications for the near-term inflation outlook.”
• Solely looking at deviations from trend, M/M core CPI inflation would be 0.04pp higher and core PCE 0.016pp higher going forward. However, this approach gives an upper bound of the potential impact - “the actual magnitude is likely to be smaller.”
• “A 5pp increase in the weight assigned to single-family detached homes would only be able to explain the surprise in OER inflation for January if rent inflation of single-family detached homes was significantly higher than other structure types, which is inconsistent with private rent data.”
• “A large part of the acceleration in OER inflation in January might have been attributable to monthly noise, as OER inflation in small cities sometimes shows an idiosyncratic move. As a result, we revised up our monthly OER inflation forecast by about 5bp per month, but given a small weight of OER in core PCE price index, the impact on our core PCE y-o-y inflation forecast is less than 10bp.” They still seen core PCE falling below 2.5% Y/Y in Q2.