Inflation is edging back toward pre-pandemic rates in the US, but rent inflation still has a long way to go. To put it into numbers, the all-items consumer price index was just 3.2% higher in October than a year earlier, but the rent of primary residence index was up 7.2%. Meanwhile, the index of market rents maintained by real estate marketplace Zillow was up just 3.2% — the same as the overall inflation rate.
Rent of primary residence currently accounts for 7.6% of the basket of goods and services that make up the CPI; something called owner’s equivalent rent accounts for 25.7%. OER is, in the words of the CPI measurers at the US Bureau of Labor Statistics, the “implicit rent that owner occupants would have to pay if they were renting their homes.” Its weight in the CPI is determined by asking homeowners how much they think their homes would rent for, but the changes from month to month and year to year — the inflation rate — come from data the BLS collects on actual rents and then adjusts for the different makeup of the owner-occupied housing stock.
So about a third of the CPI and 42% of the so-called core CPI, which excludes food and energy, are based on rents, and the CPI’s estimate of rent inflation is currently more than twice what a leading market data provider is reporting. Which seems weird, right?
The disparity between the CPI and Zillow numbers is easily explained. CPI rent is meant to reflect everybody’s rents, while Zillow measures asking rents on the available-for-rent properties in its database. As of March 2022, asking rents were up 16% and house prices up 17% over the previous 12 months in Zillow’s data, but because most of the renters in the CPI housing survey were still on leases that predated those big price increases, CPI shelter inflation was only 5%. Now we’re seeing the flip side, with the CPI rent and shelter indexes still increasing rapidly as more and more leases are bumped up to higher market rents even as market rent inflation moderates.
The good news is that CPI rents and market rents will converge eventually. The bad news is that it may take a while. A better way to visualize this is by comparing rent levels as measured by the two indexes rather than annual inflation rates.
