William Simpson
The Federal Reserve’s two-year battle to control inflation is turning into a protracted war, with the central bank grappling with prices that have risen surprisingly this year. One important reason: Stubbornly high housing and rental costs that have sapped household budgets across the U.S.
The Fed will examine the latest Consumer Price Index report on Wednesday morning for signs that its campaign to finally snuff out runaway inflation by raising interest rates is working. Wall Street expects a slight improvement, with economists forecasting the CPI in April rose 3.4% from a year earlier, slightly below March’s 3.5% rise, according to financial data firm FactSet.
Still, 3.4% remains well above the Fed’s 2% inflation target. Fed Chairman Jerome Powell acknowledged Tuesday that his confidence that inflation will decline is “not as high as it was.” .
One of the main drivers of inflation is real estate, which contributes about a third of the CPI and which economists predict could continue to be a thorn in the Fed’s side throughout 2024. This is creating something of an obstacle, given that the Fed is delaying cutting interest rates until it sees further progress in inflation; This, in turn, keeps borrowing costs high, including mortgage rates, which are now near 20-year highs.
The so-called shelter part of the CPI is capturing the price shock of people moving into new apartments after staying in place for years. These renters are more likely to experience a sharp increase in their housing costs as they jump from lower-cost apartments to market-rate rentals, Zillow Chief Economist Skylar Olsen told CBS MoneyWatch.
“The big ‘a-ha’ is that the full IPC is capturing people who haven’t moved in a while,” Olsen said. “The fact that we continue to have people who haven’t moved in six or eight years, that’s going to keep that growth going.”
But aren’t rents cooling?
It could take years for this data to make its way through the housing portion of the CPI, because some renters continue to move from their long-term — and cheaper — housing to market-rate apartments, Olsen noted.
But as many apartment hunters will know, rents are really cooling right now, thanks in part to new rental units built in recent years to meet the growing demand for housing. In some cities, rents are really falling — but don’t expect that to show up in CPI data for a while longer, economists said.
In April, the monthly rent for a typical 1-bedroom apartment in the U.S. was $1,486, down 0.6% from a year earlier, according to the listing service. Zumperwhile 2-bedrooms were around $1,843.
On May 1st Press conference, Powell hinted at this dynamic, noting that the Fed was surprised by how long it took for CPI data to reflect the cooler rental market. He added that while he is confident that CPI housing data will eventually reflect this decline, he is “not as confident in the timing of this.”
“These market rents actually take years to turn into rentals for tenants who are extending their leases,” Powell said. “It’s complicated, but the story is that it takes some time for that to happen.”
Home Ownership and Affordability
The CPI has another peculiarity when it comes to tracking housing costs: it doesn’t actually track house prices, because it considers housing value to be an asset, similar to stock prices, which are also not tracked by the inflation index, observed Lawrence. Yun, chief economist at the National Association of Realtors.
Instead, the CPI measures home ownership costs by tracking what it calls homeowner income equity, or the hypothetical amount a homeowner would pay to rent their home in the current market.
But this also sparked debate among some economistsgiven that most homeowners are locked into 15- or 30-year mortgages at fixed interest rates and are therefore not subject to the pricing vagaries of the housing market.
“Landlords are not feeling any impact from rents because the monthly payment is absolutely fixed,” Yun noted. “Mortgage costs are not rising in line with inflation numbers, but that is not part of the CPI.”
House prices, of course, are very important for first-time buyers looking to make their first home purchase, although this is not a number reflected in the CPI, Yun added.
The Fed’s decision to delay cutting rates could be contributing to persistent housing inflation, said Rakeen Mabud, chief economist at the Groundwork Collaborative, a progressive advocacy group that is urging the central bank to start cutting rates.
“When the Fed raises interest rates, mortgage rates also rise,” Mabud said in a statement. post on social media. “This means many potential buyers are shut out of the decision to buy a home. Where do these potential buyers go? Back into the rental market, increasing demand among renters and driving up rental costs.”
