How rising rental prices are driving up inflation

Housing continues to get more expensive, and while new data shows that price increases are slowing, rising rental prices underscore how difficult it can be to keep headline inflation in check.

Inflation was 8.3% higher in August than a year earlier, according to the Consumer Price Index report released Tuesday. It’s slower than the month before, when inflation rose 8.5%, but it’s still uncomfortably high for consumers and policymakers. Prices rose 0.1 percent from July to August.

One of the biggest factors of inflation has been the rise in rental prices. According to Zillow data, the typical U.S. monthly rent was $ 2,090 in August, up 12.3% from the previous year. It’s much higher than it was before the pandemic – in February 2020, the nation’s average rent was $ 1,660.

According to the CPI report, house prices – which include rent, accommodation away from home and family insurance – increased 0.7% in August from the previous month, the largest monthly increase since 1991. The rental index itself has also increased by 0.7% since July, and has risen by 6.7% from a year ago.

Economic policymakers watch rental prices closely, not only because consumers spend a large portion of their budget on housing, but also because the category contributes significantly to inflation. Shelter is the largest component of the Consumer Price Index, which accounts for around 30 percent of headline inflation. It is an even larger portion of the “core” CPI, which excludes the volatility of food and energy prices. CPI data is one of the factors Federal Reserve officials take into consideration when making key monetary policy decisions.

“Housing costs are still rising in the CPI measure,” said Chris Salviati, senior economist at Apartment List. “This is definitely playing an important role in keeping the inflation number high.”

At the onset of the pandemic, rental prices rose as more people entered the market and family formations increased. Salviati said this increase in demand was driven in part by young people who moved out of their parents’ homes and by people who wanted more space while working from home. But there weren’t enough new units on the market to keep up with demand, especially as the pandemic caused construction delays, increased material costs and labor shortages, Salviati said.

Although government data shows that rental prices continue to rise rapidly, there is some reason to believe they could start easing in the coming months.

Where the rents might go from here

Rental prices began to rise more slowly after rising earlier during the pandemic, according to data from the private sector. A recent Apartment List report found that the national rental index rose 0.5% in August from the previous month, down from 1% in July. According to the report, rents have risen at a significantly slower pace than last year, although prices are rising faster than before the pandemic.

National vacancies have also started to increase. After dropping to a low of 4.1% last fall, vacancies rose slightly to 5.1%, meaning there are more units available, according to the report.

Sarah House, senior economist at Wells Fargo, said rental prices could decelerate as supply improves and landlords begin to “get a little more realistic” about how much they can charge before we see more pushbacks from renters. . But she said that CPI-sized rental prices tend to move slowly, so it may take some time for government data to reflect the deceleration in prices that private sector data may already be experiencing.

This is largely due to the fact that government data also takes into account existing rents, while many private data sources only look at the prices of new leases to capture current market conditions. Since rents typically change as leases expire, which tends to happen every year, this can lead to a delay in government data.

“I think we are close to the beginning of a slowdown in the monthly rate of price increase,” House said. “But it is still likely to remain quite strong in a historical sense for some time.”

Omair Sharif, founder and president of research firm Inflation Insights, also said that rising rental prices could slow down in the coming months as the CPI measure eventually catches up with private sector data.

“Around the end of this year and into the first quarter of next year, we should probably start seeing CPI data starting to more closely mimic what we’re seeing in terms of that deceleration,” Sharif said.

A slowdown in rental price growth could help reduce headline inflation closer to the Fed’s 2% annual inflation target. Although prices for rent, food and medical care all increased in August, the prices of gasoline, used cars and airfares all fell.

However, mortgage rates have skyrocketed to their highest levels since 2008 and home prices remain much higher than before the pandemic. This has made it harder for people to afford monthly payments, leading to some potential homebuyers being priced out of business. If people continue to rent instead of buying, this could increase the demand for rents and keep prices high.

“We’re starting to see some of those potential first-time homebuyers being sidelined,” Salviati said. “Those people stay in the rented units longer, so that also adds a bit of stiffness.”

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