Rent could be a persistent factor in rising consumer prices

A “For Rent” sign is placed in front of a house in Arlington, Virginia, United States on June 8, 2021.

Will Dunham | Reuters

Large post-pandemic price increases in parts of the economy appear to be fading, but rents are one area where inflation is expected to hold.

The consumer price index rose 0.5% in July, well below the 0.9% pace recorded in June. Basic consumer prices, excluding food and energy, rose 0.3% last month, below economists’ expectations for a gain of 0.4%. Year over year, the CPI rose 5.4% year over year in July, as in June.

Economists say there are signs the spike in inflation is temporary, as Federal Reserve officials have argued. But a large part of direct consumer spending is rent, and it is expected to increase well in the future.

Reports from the private sector point to double-digit increases in rents in the United States this year, but the Consumer Price Index actually showed a slight moderation in rental price increases in July. Economists say that should change as Bureau of Labor Statistics data catches up and the increases should be enough to keep the debate going over whether the rise in inflation is temporary.

“The composition was mixed, but generally weaker than expected, as real estate inflation slowed (owner’s equivalent rent + 0.29%, rent + 0.16%) unlike the surge in rents in the sector data” , wrote Goldman Sachs chief economist Jan Hatzius. .

“In addition, the volatile hotel category contributed 0.08 pp to the core,” he added. “The price levels for hotels and air tickets have returned to roughly their pre-pandemic trends, which means that most of the increase in inflation due to the rebound in prices for hospitality services. journey is now behind us. “

The rigidity of higher rents

Rent and owners’ rent cover the cost of housing and account for about one-third of the CPI. Rent inflation is more rigid and more persistent than other price pressures. In the CPI, rents rose slightly more slowly in July than in June.

“The rent component is significantly underestimated compared to reality, which means that in the coming months the rent will catch up,” said Peter Boockvar, chief investment officer of Bleakley Global Advisors. “The rent increases, which are the biggest part, will only accelerate here. I don’t see the rent increases as transient.”

Boockvar said that the List of apartments National rental report showed a 2.5% increase in rental prices from June to July, and an 11.4% increase for 2021 so far.

Housing has been one of the hottest areas of the economy as low interest rates fueled an increase in residential activity and consumers have left cities and different regions due to the pandemic.

“Much of the slowdown that we are seeing [in CPI] this month reflects used cars and many effects of Covid, ”said Kevin Cummins, chief economist at NatWest Markets. “The story of rents is that we’re going to see them rise over the rest of the year, but the modest slowdown in the CPI might just be a jerk.”

“There is a lot of data from the private sector on rents,” he said. “These have all been a lot stronger and it’s true they were a lot weaker last year, so they’re probably exaggerating the strength of rents, but they indicate that rents are going up.”

Impact of rents on long-term inflation

Protesters attend a rally calling for an extension of the state’s eviction ban until 2022 and rent cancellation, in Lower Manhattan, New York, on August 11, 2021.

Ed Jones | AFP | Getty Images

Economists say rental costs could be a factor keeping the pace of consumer inflation slightly above the Fed’s target of 2%, once the effects of the economic reopening and shortages in the economy. supply chain will spill over into the system.

“I find a lot of comfort in this [CPI] strongly suggests that the rise in inflation is temporary, that it is due to the disruptions created by the pandemic, and as we resolve these disruptions, inflation will moderate and come back close to the Fed’s target. said Mark Zandi, chief economist at Moody’s Analytics. “It’s going to take a while, probably until around the same time next year, where we’re back to 2%. But that’s where we’re going. “

But while inflation was often below the Fed’s target before the pandemic, it could be slightly higher due to rent inflation. “Instead of being 1.7%, 1.8%, it will be 2.1%, 2.2% and it will come down to rent inflation and it will persist until the offering starts and it’s going to take a number of years, ”Zandi says.

He pointed to data from Yardi Matrix – an analytics firm that studies commercial real estate – which shows the multi-family rental industry had a record month in July, with rents up 8.3% from year on year and single-family rentals up 12.8%. He said that due to the Bureau of Labor Statistics methodology, rent increases will appear later in the CPI.

The pressure on rental prices is linked to a long-lasting shortage of housing stock, which dates back to the financial crisis, Zandi said. In the wake of the pandemic, people have also moved from cities, and the areas with the tightest housing are in the south and southwest.

“We need 1.8 million units a year, and we’re still at 1.6, 1.7 million. We’re getting closer but we’re still lagging behind,” he said. “Vacancy rates across the housing stock are at their lowest level in 35 years and are falling rapidly.

Cummins said the higher rental costs were part of the differences between its core CPI inflation target of 2.4% at the end of 2022 and the Fed’s target. While the central bank monitors personal consumption expenditure inflation data, it expects just 2.1% in that baseline measure by the end of next year.

“The job market right now is pretty strong … If the job market is likely strong you should see rents go up,” Cummins said.

Cummins also said it appears core CPI is moderating.

In July, prices for new vehicles rose 1.7% in July after gaining 2% in June. Air fares fell 0.1% in July, but are up 19% year over year. The out-of-home housing index continued to rise, increasing 6% in July after rising 7% in June.

Food continued to advance, up 0.7%, and out-of-home food increased 0.8%. Energy costs also continued to rise. Gasoline increased 2.4% and nearly 42% year-on-year.

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