Rents and Inflation
What economists missed in the CPI report
Let’s talk about inflation, a delicate subject as there is a heated debate whether it is transitory or not. Although so far we had a “transitory view”, by looking at the recent data, our team may have found something that may not be as transitory as firstly perceived → rents.
Before we dive deeper into the rent problem, let’s rewind time and talk about the CPI release from last week.
CPI data
Last week’s CPI numbers came in line with economists’ expectations. CPI increased 0.5% on a month-over-month basis, matching a consensus forecast from economists surveyed by Dow Jones. So-called core inflation, which excludes energy and food, rose by 0.3% last month, shy of a forecasted 0.4% increase and well below June’s rise of 0.9%. Year-over-year, the CPI rose 5.4% year-over-year in July, the same as June.
Although still elevated, inflation is considered to have peaked in July, with many spikes driven by pent-up demand or shortages appearing to be ebbing. For example, we saw some massive spikes in used car prices, but in July they rose by just 0.2% after a 10% increase in the prior month.
This moderation is a leading argument to sustain Jerome Powell’s thesis about transitory inflation.
The market reaction to the news was the one everybody should expect after reading the report: the S&P 500 opened higher, while the yield on the 10-year Treasury fell along with the U.S. dollar. The downside move in Treasuries and U.S. dollars was the investor’s way to digest the fact that the Fed may not be so eager to taper now that inflation may have peaked.
But there may be something that many missed in this report and that’s rents. And inflation in rent is stickier and more persistent than other price pressures.
However, there was no big spike in the CPI report regarding the rents. Why’s that? Well, CPI is not state of the art, so sometimes it is lagging. We got no better way to measure inflation, so economists decided to stick with the CPI. No wonder this isn’t the Federal Reserve’s preferred measure of inflation.
So, how do we know that rent prices rose? Well, the Apartment List National Rent Report showed a rise of 2.5% in rental prices from June to July, and an 11.4% increase for 2021 so far.
U.S. single-family home rental prices jumped 7.5% in June, showing no sign of abating amid a hot housing market and construction lags.
The year-over-year pace accelerated from 6.6% in May, which was the biggest percentage gain since at least 2005, according to CoreLogic Inc., which tracks changes nationally. The most expensive homes saw the biggest jump in rents, at 9.6%. — Bloomberg
Private sector reports show double-digit increases in rents across the U.S. this year, but the consumer price index actually showed a slight moderation in rental price gains in July.
Economists say that should change as the Bureau of Labor Statistics data catches up, and the increases should be enough to keep the debate going about whether rising inflation is temporary. — CNBC
Rent and owners’ equivalent rent cover housing costs and are about a third of CPI. So, if rents shoot up, so will do the CPI.
Housing market and how we got here
Housing has been one of the hottest areas of the economy, as low interest rates fueled a surge in residential activity and consumers moved out of cities and to different regions due to the pandemic.
The rental market, which slumped during the pandemic, has snapped back more quickly than many economists predicted.
When the pandemic hit, many people who lost their jobs discontinued their apartment leases to live with parents or roommates temporarily. Others fled big cities out of health concerns. Apartments went empty, and landlords began offering incentives, such as a free month, to entice tenants.
Now, as people move out on their own again or return to cities and office jobs, and as existing renters find they can’t afford to buy a home in a booming housing market, demand for apartments and single-family rentals is rebounding — and even looking hot in some places. Rents last month rose 7 percent nationally from a year earlier, Zillow data shows. While that was measured against a weak June 2020, the gain was also a robust 1.8 percent from May.
“After a year, jobs are coming back strongly, and this is recreating the housing demand for rental units and occupancy is rising,” said Lawrence Yun, chief economist at the National Association of Realtors. — NY Times
Conclusions
“A lot of the slowing we’re seeing [in CPI] this month reflects used cars and a lot of the effects of Covid,” NatWest Markets chief U.S. economist Kevin Cummins said. “The rent story is we’re going to see them rising over the rest of the year, but the modest slowing in today’s CPI could be just a blip.”
He said because of the Bureau of Labor Statistics’ methodology, the rent increases will show up in CPI later.
At first, our team was agreeing with the temporary inflation thesis, but now we tend to discover more and more arguments that prove that inflation is more persistent than expected. For now, we are eager to find out where the Fed is standing during the Jackson Hole symposium.