Why slowing rent growth hasn’t shown up in government inflation data

Why it matters: If rents finally start to provide some relief to overall inflation numbers, it'll give some confidence to policymakers who want to ensure this period of high inflation is truly over before pivoting to lower interest rates.

Details: The disconnect between market rents and official inflation numbers is due to quirks in how the government calculates rent inflation.

• The narratives, however, have diverged for far longer than economists expected.

What's going on: "Annual rent growth has stabilized over the last few months at slightly lower than pre-pandemic norms," Nicole Bachaud, a Zillow economist, wrote this month.

• Zillow's rent index fell 0.2% in December and was up just 3.3% over the last year.

Yes, but: The December Consumer Price Index shows shelter is still a prominent source of sticky inflation — responsible for more than half of the monthly increase.

• Rents for primary residences were up 0.4% in December alone, and are up 6.5% over the last year, per the Consumer Price Index.

What they're saying: "Despite significant moderation in asking rent inflation, CPI rents continue to run above pre-pandemic levels," Bank of America economists Stephen Juneau and Michael Gapen wrote in a note.

• The economists say this is "due to [CPI] rents still playing catch-up to the level of asking rents," but could also reflect "regional dynamics as rents in the Northeast have proven firmer."

How it works: The unusually rapid rise in rents during the pandemic means the gap between the private and the government data is larger than usual.

• The government uses a sample of rental prices, some of which are under fixed agreements that may not change for at least a year.

What to watch: Economists still say the catch-up is close at hand.

• "The combination of a now-modest catch-up effect and a benign outlook for new-lease rent growth suggests that official shelter inflation is on course to return to pre-pandemic levels later this year," a team of Goldman Sachs economists wrote in a note last week.
• They argue that a surge of new multifamily housing will "push the rental vacancy rate further above pre-pandemic levels." Plus, they say the mortgage rates' recent downward slide "has made buying relatively more affordable, which should in turn weigh on rental demand."

The intrigue: The Labor Department has a (relatively) new gauge of rent price growth — one that offers a small clue about cooler price pressure in freshly signed leases.

• "Prominent rent growth indices often give strikingly different measurements of rent inflation," economists at the Labor Department and Cleveland Fed wrote in a paper last year unveiling the new gauges.
• The new indices, they note, "show that this discrepancy is almost entirely explained by differences in rent growth for new tenants relative to the average rent growth for all tenants."

Catch up quick: The New Tenant Rent Index measures the prices renters see when they sign new leases; it does not measure continuing leases the way the official CPI rent measure does.

What's new: In the final quarter of 2023, that index showed a record 4.7% drop. The series is new, but officials released data going back to 2005.

• In contrast, another rent index — a measure "with a scope similar to the CPI," the government says — kept rising at a pace much faster than pre-pandemic norms.

The bottom line: "We've been talking about this since the end of 2022," Fed governor Christopher Waller said last week — referring to expectations that CPI shelter costs would ease.

• "For all the signals we were given, rent inflation was going to come down. It's just taking awhile to show up in the official CPI data," Waller added.