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Rising rent prices are keeping inflation high

Shelter prices rose 0.7 percent in August, the biggest monthly jump since 1991.

A “For Rent” sign is posted near a home in Houston, Texas, in February. Rents have started to grow more slowly after shooting up rapidly earlier this year.
Brandon Bell/Getty Images
Madeleine Ngo covers economic policy for Vox. She previously worked at the New York Times, the Wall Street Journal, Bloomberg, and the Philadelphia Inquirer.

Housing keeps getting more expensive — and even though new data shows that overall price increases are slowing down, surging rent prices underscore how difficult it could be to bring inflation under control.

Prices were 8.3 percent higher in August compared to a year before, according to the Consumer Price Index report released on Tuesday. That’s slower than it was the month before, when inflation climbed 8.5 percent, but it’s still uncomfortably high for consumers and policymakers. Prices picked up 0.1 percent from July to August.

One of the biggest drivers of inflation has been higher rent prices. According to data from Zillow, the typical US monthly rent was $2,090 in August, up 12.3 percent from a year before. That is much higher than it was before the pandemic — in February 2020, the nation’s average rent was $1,660.

According to the CPI report, shelter prices — which include rent, lodging away from home, and household insurance — rose 0.7 percent in August from the month before, the biggest monthly jump since 1991. The rent index by itself also increased 0.7 percent from July, and was up 6.7 percent from a year ago.

Economic policymakers closely watch rent prices, not only because consumers spend a big portion of their budgets on housing, but also because the category is a major contributor to inflation. Shelter is the largest component of the Consumer Price Index, making up about 30 percent of overall inflation. It’s an even larger portion of the “core” CPI, which excludes volatile food and energy prices. The CPI data is one of the factors that Federal Reserve officials consider when making key decisions about monetary policy.

“Housing costs are still trending up in the CPI measure,” said Chris Salviati, a senior economist at Apartment List. “That’s definitely playing an important role in keeping that inflation number elevated.”

Earlier during the pandemic, rent prices spiked as more people entered the market and household formations increased. Salviati said this jump in demand was driven in part by younger people moving out of their parents’ homes and people wanting more space as they worked from home. But there weren’t enough new units hitting the market to keep up with the demand, especially since the pandemic brought on construction delays, increased material costs, and labor shortages, Salviati said.

Although government data shows rent prices continuing to pick up rapidly, there is some reason to believe that they could start to ease in the coming months.

Where rents could go from here

Rent prices have started to grow more slowly after shooting up earlier during the pandemic, according to private-sector data. A recent report from Apartment List found that the national rent index rose by 0.5 percent in August from the month before, down from a 1 percent increase in July. Rents have risen at a significantly slower pace compared to last year, even though prices are increasing faster than they did before the pandemic, the report found.

National vacancies have also started to increase. After dropping to a low of 4.1 percent last fall, apartment vacancies have climbed slightly to 5.1 percent, meaning that there are more available units, according to the report.

Sarah House, a senior economist at Wells Fargo, said that rent prices could be decelerating as supply improves and landlords start to “get a little bit more realistic” about how much they can charge before they see more pushback from renters. But she said that rent prices in the CPI measure tend to move slowly, so it could take time for the government data to reflect the price deceleration that private-sector data may already be picking up.

That’s largely because the government data also takes into account existing rentals, while many private data sources only examine prices for new leases to capture current market conditions. Since rents typically change when leases expire, which tends to happen annually, this can lead to a lag in government data.

“I think we’re close to beginning to see a slowdown in the monthly rate of the price gain,” House said. “But it’s still likely to remain pretty strong in a historical sense for some time.”

Omair Sharif, the founder and president of research firm Inflation Insights, also said rent price gains could slow in the coming months as the CPI measure eventually catches up to private-sector data.

“Around the end of this year into the first quarter of next year, we should probably start to see the CPI data start to mimic more closely what we’re seeing in terms of that deceleration,” Sharif said.

A deceleration in rental price growth could help bring down overall inflation closer to the Fed’s goal of 2 percent annual inflation. Although prices for rent, food, and medical care climbed in August, prices for gasoline, used cars, and airline fares dropped.

Still, mortgage rates have skyrocketed to their highest levels since 2008 and home prices remain much higher than they were before the pandemic. That has made it harder for people to afford monthly payments, leading to some potential homebuyers being priced out of the market. If people continue renting rather than buying, that could drive up demand for rentals and keep prices high.

“We’re starting to see some of those potential would-be first time homebuyers getting sidelined,” Salviati said. “Those folks are remaining in rental units for longer, so that adds some tightness as well.”