MNI INTERVIEW:US CPI Rent Costs To Gain Momentum-Fed Economist

The boost to CPI inflation from housing is likely to accelerate further before reversing course even though the rental market from which such measures are computed has started to soften, Cleveland Fed economist Randal Verbrugge told MNI.

"I expect CPI rent to have a bit of momentum because it's just much more slow moving. I sort of expect CPI rent to grow a little bit more and then start to slowly decelerate," he said in an interview. "New tenant rents are probably going to decelerate back to kind of a normal level and slowly average rents will fall back to that."

The CPI's measure of rents was up 0.8% in September, the largest monthly increase in over three decades, and 7.2% over the year. Verbugge, along with the Cleveland Fed's Lara Loewenstein and BLS coauthors Brian Adams and Hugh Montag, show in a recent paper rent inflation for new tenants leads the official BLS rent inflation by roughly 12 months.

NEW TENANTS

"The top takeaway is the reason that outside rent measures differ from official CPI rent is that they're tracking new tenant rents rather than the rent facing a typical renter," Verbugge said about the paper. The authors conclude that taking a broader measure of rents, as the CPI does, is the right way to understand price growth.

The CPI attempts to measure contract rents, also known as in-place rents, and those are an attempt to measure what households actually pay, whereas most private-sector sources measure the asking rent only for a new lease. The BLS said earlier this year it has plans to publish research on a rent index focused on new tenants and is exploring alternative data sources.

The Zillow Observed Rent Index (ZORI) began to decelerate in year-over-year terms last March, suggesting a deceleration would first be visible in the March 2023 CPI data, to be released in mid-April.

GIVE OR TAKE

Verbugge said the statistics suggesting a year difference between inflation for new tenants and official BLS rents are not the final word and the lag could be shorter or longer.

"A correlation is not a final word on anything I wouldn't think, especially because any statistic like a correlation is going to be really pulled a lot by any extreme observations," he said. "Maybe it's 13 months, maybe it's 11 and maybe it'll take longer when things are quiescent. I can imagine that happening."

At the same time, Verbugge said, increased use of pricing software among property managers and landlords could lead to a more rapid fall in rent inflation if market conditions were to sour further.

""That is going to make rents more responsive than they used to be to market conditions. We might see rents fall much more rapidly if we enter a recession, let's say, then we would have about 10 years ago when people weren't using this kind of software and that could change inflation dynamics," he said.