Escalating Rents Spark Inflation Concerns While Influencing Interest Rate
Escalating rents in the housing market raises inflation worries, influencing interest rates amid ongoing affordability issues. These effects ripple through different sectors, shaping the Federal Reserve's interest rate policies. Meanwhile, surging gas prices further add to the complexity, prompting a closer examination of the potential impacts.
Inflationary Impact of Escalating Rent Prices
Expectations are high as markets await the release of February's Consumer Price Index (CPI) data. Forecasts project a 3.1% annual increase, maintaining January's level, with a slight uptick from the previous month at 0.4% compared to 0.3%. The primary driver behind this inflationary pressure is the significant surge in rent over the past year, stubbornly resisting Federal Reserve interventions.
Shelter costs, representing roughly 30% of the CPI, have soared by 6% since last year, albeit slightly down from the peak of an 8.1% annual rise observed in February 2023. "About two-thirds of the core CPI increase over the past year is attributable to escalating shelter costs," said Greg McBride, Chief Financial Analyst at Bankrate.
Furthermore, predictions regarding shelter costs are mixed. In the upcoming CPI reading for February, Bank of America analysts express skepticism about significant changes in shelter costs. They anticipate persistent shelter inflation throughout the year, cautioning that the moderation in services inflation may be slower than market expectations.
In contrast, Federal Reserve Chair Jerome Powell offers a ray of hope, hinting at a potential easing in shelter prices shortly. "We think that’s coming, and we know it’s coming. It’s just a question of when and how big it’ll be," he asserts.
Despite his positive outlook, not all economists share this belief, with Capital Economics analyst Thomas Ryan projecting that rent prices will stabilize, rather than decline, in 2024.
Greedflation and Local Legislation Challenges
Ritti Singh, an organizer with Housing Justice for All, highlights the phenomenon of "Greedflation," where landlords exploit inflation as an excuse to raise rents. Despite the Federal Reserve's efforts, Singh contends that local regulations are essential to effectively combat rental inflation.
CPI Data Scepticism and Lagging Trends
On the other hand, Some economists argue that the Consumer Price Index (CPI) data may present a skewed and potentially false picture of current inflation levels. The CPI primarily tracks rents paid by renters, but a significant portion of shelter costs in the index stems from "owners’ equivalent rent."
This metric attempts to gauge how much rent homeowners would pay if they rented instead of owning their homes. However, critics argue that this creates a false equivalency, as homeowners own their homes.
Moreover, concerns arise about the lagging nature of CPI data. Research by Goldman Sachs and the Dallas Fed reveals that actual rent and owners’ equivalent rent lag behind the rest of CPI by a full year. This means that any current deceleration in rent prices won't be fully reflected in inflation data until February 2025.