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Rents drive inflation. But there is something wrong with the data.

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Inflation has arrived hotter than expected in January, and it may take a few more months to know if this was a fluke or if the price increases are becoming more persistent. But a key part of the inflation picture may already appear much worse than reality.

The cost of rent has been driving inflation for months, at least according to data presented in official reports. The Federal Reserve has pushed its base interest rate to the highest level in decades, and prices in most other areas are moderating. Economists therefore wonder why rents have not followed suit. Indeed, almost every data source except the Consumer Price Index kept by the Bureau of Labor Statistics shows that these costs are falling significantly, if not declining, since growth peaked in early 2000. Last year.

New data from Apartment List shows that rents fell for six straight months before rising slightly in February. Lease costs are down 1% from last year nationally, and more than half of the nation’s largest cities saw a decline. In Austin, costs fell 6.7 percent. In Atlanta, 5.3 percent. And in Nashville, 5.1 percent.

It’s the kind of recovery that housing experts are tracking closely with real-time data, especially as hundreds of thousands of new homes hit the market and increase supply after years of shortage. Demand has also stabilized as tenants stay put, unlike the frenetic days of the coronavirus pandemic.

Inflation slowed in January, but not as much as expected

But this change doesn’t show up much – if at all – in official inflation reports. In January, a key measure of housing costs increased from the previous month. The CPI also shows that housing costs rose 6 percent from last year – down from a peak of 8.1 percent, but still above normal.

Economists are quick to say that a a turning point is approaching and January data is often riddled with seasonal problems that drive up inflation. They also argue that real-time measurements just take time to unravel the shaky math behind the BLS calculations. This is partly because an individual unit is only included in surveys every six months, even if the cost of the lease has changed in the meantime. Additionally, the BLS tracks rents for all tenants, not just those starting new leases: people who stay put for a year or more might not see their costs change as quickly.

But experts and policymakers still wonder why the divide remains so pronounced month after month.

“We are watching a big mountain of snow melt, and every 10 minutes we see that there is still a big pile of snow,” said Igor Popov, chief economist at Apartment List. “We’re monitoring it so carefully that we don’t feel like we’re seeing a lot of progress.”

Overall, inflation has made significant progress since reaching its highest level in 40 years. Energy prices have fallen significantly since the surge following Russia’s invasion of Ukraine. Supply chains have recovered enough to keep prices under control for all kinds of goods, from electronics to bicycles. And while January’s inflation snapshot eroded some of that progress, it followed enough months of improvement for central bankers to pay attention. several interest rate cuts This year.

Yet housing continues to drive overall inflation numbers. And the longer this goes on, the more difficult the Federal Reserve’s fight against inflation could become. To rent out represents a large part of the CPI. This means the Fed won’t be able to return headline inflation to normal levels until the housing sector slows down, too. (The Fed prefers to use a different indicator of inflation than the consumer price index, but the measure favored by the central bank, personal consumption expenditurealso weighs heavily on housing.)

Rent has never been more affordable, especially for the middle class

Part of the problem is that inflation moves slowly. Even when real-time rents are stable or falling, economists know they need to look longer term for these developments to worsen over time.

Orphe Divounguy, senior economist at Zillow, proposed a hypothetical scenario in which market rent growth stops completely. Even then, it would take two more years of stable numbers to bring the entire housing index back to a more normal 2 percent.

“This shows how powerful the forces of undersupply are,” Divounguy said.

The real estate market has been turned upside down during the pandemic. But experts point to years, even decades, of slow housing construction before then. this meant the country did not have enough housing when the pandemic hit. Suddenly, starting in 2020, people wanted to move quickly, separate from their roommates or spread out into more space. Very quickly, the increase in demand came up against a lack of provide.

Eventually, new projects emerged as supply chains cleared backlogs and construction hiring ramped up. As part of this catch-up, hundreds of thousands of units were released last year, with another million planned for 2024. Analysts expect prices to fall even further as inventories continue to grow.

Yet other segments of the real estate market haven’t exactly performed as expected. High interest rates generally slow down the home buying market by driving up mortgage rates, making it harder for buyers to afford a home unless prices fall. But the sector has proven remarkably durablewith property prices continuing to rise despite mortgage rates hovering around 6 or 7 percent.

However, the Fed is betting that rent inflation will take hold. At a press conference in January, Fed Chairman Jerome H. Powell said it was “everyone’s prediction” that this change would eventually occur.

“We think it’s coming, and we know it’s coming,” Powell said. “It’s just a question of when and how big it will be.”

A work? Check. A place to live? Not really.

Much of the country may already be there. Take Florida, which has seen some of the greatest the strongest rent growth during the pandemic surge. Supply is growing rapidly: Miami and Orlando both have more than 20,000 apartments under construction, representing more than 10 percent of the overall inventory in those markets, according to the Florida Apartment Association.

Now, major cities in Florida are showing rent reductions. Rent in Jacksonville is down 3 percent from last year. Orlando experienced the same decline.

Even in markets where rents continue to grow, the gains are much more modest. In Miami, rents increased by almost 4% in early 2023. A year later, prices have only increased by 1.7 percent.

“We understand that there needs to be a rubric to account for a much broader data set,” said Chip Tatum, executive vice president of the Florida Apartment Association. “But when you think about it at a more granular level, it’s much more complex than this data set suggests.” Lags do not always correspond to what the market dictates.

This picture partly explains why economists remain optimistic that the backlogs will eventually be closed. Jay Lybik, national director of multifamily analysis at CoStar, said it typically takes about three-quarters of the year to filter market rents into government statistics. This time frame could become longer given the bizarre performance of the economy and the resulting faulty models. But hopes are not yet disappointed.

“The way (the CPI) looks at housing in general,” Lybik said, “just doesn’t seem to match reality.”

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