Housing a big driver of inflation in the July CPI, but there’s a lag
Housing a big driver of inflation in the July CPI, but there’s a lag
Ninety percent of the monthly increase in prices compiled in the July consumer price index — 90% — was from shelter, the cost of having a roof over your head. Shelter costs were up 0.4% in July from June, same as in May. But these numbers are not telling the whole story.
If we didn’t have to worry about housing, core inflation would be totally under control by now, according to Lisa Sturtevant, chief economist with real estate multiple listing service Bright MLS.
“If you removed shelter from the CPI measure, we would have been below 2% for the last six months,” Sturtevant said.
But of course, we do have to worry about housing because we have to live somewhere. And living somewhere was 5.1% more expensive this July than last July, according to the CPI.
However, “that doesn’t reflect what renters are seeing on the ground right now,” Sturtevant said.
If you look at up-to-date market data for new leases, coming from sources like Apartment List, Sturtevant said, rents have declined 1% or are flat year over year.
“Any way you slice it, though, rents are not rising by 5% year over year,” Sturtevant said. “The CPI rent index will lag these private market measures by roughly about a year.”
So it’s not that the CPI is wrong, it’s that it’s slow.
Private real estate companies report real-time rents for new tenants and new leases, but the government figures include people who are renewing their leases.
“And renewals just don’t move to the same extent they do for new tenants, up or down,” said Omair Sharif, president of research firm Inflation Insights.
And the government waits six months before checking back with the same people. So yeah, it’s slow.
“You can sort of think of it as a tanker turning slowly,” Sharif said.
Looking ahead, what does the latest market data suggest is in store for us?
“The market rents we are tracking, we expect that to grow roughly 1.4, 1.5 percentage points,” said Lu Chen, a director of housing research with Moody’s CRE.
Significantly lower, Chen added, than the long-term average of just under 4%, and definitely not the 5% in the CPI. So, we can chill.
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