Rent Growth Is Slowing. Why Doesn’t Inflation Show It?

Data Divergence

Housing costs are a huge part of the average American’s budget. But the data on rent growth is wonky, painting a confusing picture for policymakers.

In recent months, private-sector data like Zillow’s (Z) Observed Rental Index has shown a deceleration in the cost of new leases for houses and apartments. But inflation measures like the Labor Department’s Consumer Price Index (CPI) still show rent costs trending up. So where’s the disconnect?

The Price Puzzle

The disconnect stems from the methods the government uses to calculate rent inflation.

The CPI measures continuous rent prices – but most people don’t resign their leases on a monthly basis. That’s why the continuous measure of rent prices takes much longer to reflect what’s going on in the market of newly signed leases. And after the rapid rise in rent during the pandemic, existing rental agreements may still reflect higher costs.

Indeed, the Labor Department’s New Tenant Rent Index , which measures new leases, tells a different story than the CPI numbers. In December, the CPI showed rents increased 0.4% month-over-month, and 6.5% year-over-year. But the New Tenant index showed a record 4.7% decline of rent prices in the fourth quarter.

The Inflation Impact

Fed officials and economists expect the contradictory data to play catch-up in the coming months. After all, the Fed is keeping a keen eye on monthly inflation developments. And even though the CPI isn’t the central bank’s preferred measure of inflation, the last report was heavily skewed by the seemingly higher rents represented in the continuous measure.

Fed Governor Christopher Waller echoed this sentiment in a recent speech , saying the central bank has expected shelter inflation to moderate for some time already, but “it’s just taking a while to show up in the official CPI data”.

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