Key inflation gauge doesn’t fully capture cooling rent growth

A key component supporting consumer prices is the slowdown, which experts say is not yet reflected in the government’s inflation measure.

The housing component of the CPI – which includes rent and owners’ rent equivalent – accounts for 30% of headline inflation and 40% of core CPI, which excludes food and energy prices.

Real-time data shows falling rents, but the survey used to determine accommodation prices is lagging current pricing. This disconnect could pose a problem as the Federal Reserve relies on this snapshot of inflation to determine the trajectory of future rate hikes.

“Probably not going to budge much on CPI rents. They visit places every six months,” Alan Detmeister, senior economist at UBS, told Yahoo Finance. “Most people have 12-month leases, so it’s typically a relatively slow component and will likely be very high for at least the next year.”

(Photo by Brandon Bell/Getty Images)

(Photo by Brandon Bell/Getty Images)

consumer inflation rose 8.2% year-on-year and was up 6.6% excluding the volatile food and energy sectors, according to the CPI report released on Thursday.

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The cost of housing, including rents, is a major driver of inflation.

US rental inflation accelerated in September as housing costs rose 0.7% in the second month. Both the apartment rent and the corresponding owner rent increased by 6.7% on an annual basis. The increase in owner-equivalent rent was the largest since June 1990.

Data from showed that the average rental price for September was $1,759, down $12 from the previous month and down $22 from the peak. Average rental growth in the top 50 metropolitan areas slowed to 7.8% year-on-year. This reading marks the median rental rate, which is recording its second monthly decline in eight months.

According to data from CoStar Group Inc., the growth in asking rents is also cooling off rapidly. Annual growth was 5.8% in the third quarter, compared to 9.2% in the second and 11.4% in the first quarter.

“The fact that we’ve seen these market rates really go down suggests you’re going to see CPI rent slowing down, but it will take time because they’ve already gone up so much that you won’t.” will see that CPI rents are likely to fall or turn negative soon,” Detmeister said.

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National rental listings have also picked up as the pace of newly delivered units nearly doubled, suggesting a shift in supply and demand dynamics.

James Knightley, ING’s chief international economist, said high rents had led to “fewer household formations,” he wrote in a note. “Basically, people can’t afford rent, so they live with friends/family, which leads to lower demand for housing and prices are already falling.”

Michael Pugliese, vice president and economist at Wells Fargo, estimates that rent increases will slow into next year. The slowdown in rental growth could bring inflation closer to the Federal Reserve’s target of 2% annual inflation.

“At high levels, I think price increases at such a fast pace are a sign that supply and demand are a little bit out of balance,” Pugliese said. “And from the Fed’s perspective, I think they’re trying to reconcile those two as much as they can.”

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Wall Street had hoped to see evidence of a slowdown in inflation, but recent CPI pressure further fuels expectations that the Federal Reserve will continue raising interest rates higher in the coming months — although, some argue, may not yet necessary is.

“Zillow’s rate of change in rent inflation… tends to lead the CPI. The lag varies, but assuming the recent relationship lasts, it would be reasonable to expect another month – about three – of large monthly CPI rent increases followed by a significant slowdown,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, he wrote in a note. “High rental inflation today requires no further action by the Fed.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv

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