Why high rent inflation could last until 2026
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The outlook for inflation in the next couple of years may depend on when America's renters choose to move. A new report points to rents remaining a stubborn obstacle to overall inflation returning durably to 2%.
Why it matters: Rent is the key reason inflation remains elevated in key government data, even as private sector sources have pointed to a stabilization in rents.
- A Cleveland Fed paper provides some potential answers for what's going on.
The intrigue: There is an important divide in renters — those who have moved in recent years, signing a new lease with higher rents, and others who have stayed in place with ongoing, existing leases.
- The "rent gap" between these two groups — that is, the difference between current rent and what might be paid by a new tenant — remains unusually large, according to the Cleveland Fed's model.
What they're saying: "When new-tenant rent inflation has been high, continuing-tenant rents have risen more slowly, in effect providing the latter group a discount to remain in their units," Cleveland Fed economists Lara Loewenstein, Jason Meyer and Randal Verbrugge write.
By the numbers: Before the pandemic, the researchers estimate the rent gap was about 1% — meaning that, on average, existing tenants paid about 1% less in rent than what a landlord might command for a new tenant.
- As of last month, this gap is hovering around 5.5% — well below the 11% peak but notably above pre-pandemic norms.
- That elevated gap suggests that when renters move, higher rent likely awaits them, according to the researchers.
The big picture: The Cleveland Fed model says this lagged passthrough means the Consumer Price Index's shelter category — the largest component of the inflation gauge — will remain above pre-pandemic levels until mid-2026.
- If the researchers are right, that could mean an extended period of upward pressure on overall inflation from shelter alone (and that doesn't take account of any other concurring shocks that might push up other categories).
What to watch: That forecast is highly uncertain. The researchers assume that trends around mobility and the extent to which landlords hike rent on lease renewers and new renters.
- In the early 2000s, roughly 31% of renters moved in the prior year. That has dropped to 22% today, according to Census data. The Cleveland Fed model assumes that continues.
- If renters stay in their units longer or landlords don't raise rents like researchers assume, that could bring the CPI shelter index "below its pre-pandemic average much more rapidly."
