Well, it's finally happening.
A long stretch of weak rent growth (in private sector datasets) is now translating to significant cooling in the CPI's shelter inflation numbers. Month-over-month shelter inflation for June came in at 0.17% -lowest since January 2021 AND about 10 bps BELOW the pre-COVID (2015-2019) averages.
And that contributed to today's CPI report coming in below expectations... which, in turn, "opens a path for the Federal Reserve to cut interest rates by the end of the summer," as the Wall Street Journal put it.
You can give apartment and BTR developers credit for (unintentionally) helping tame shelter inflation. This would have happened almost regardless of the Fed's rate increases. That's what happens when supply exceeds demand by a wide clip.
Remember: Rent is the largest variable in the CPI's largest category (shelter). Shelter is comprised primarily of "Rent" and "Owners Equivalent Rent," yes, but both rely on the same survey of 7k renters/month -- just with slight mechanical differences. The infamous survey of homeowners (asking what they'd charge to rent out their home) is NOT used to measure change in OER, only weighting of homeowner housing costs relate to other expenses.
So it's all about the rent. And there's a lag effect between private sector rent measures (tracking new lease rents) and the CPI's rent/shelter measure (attempting to track all rents, regardless of when lease was signed).
Going forward, we could still see some bumpy noise in CPI Shelter. It's a volatile measure historically. But the trendline should continue to move downward.
Yes, rents are growing more in SFR than in multifamily; and renewal rents are (in most markets) still above new leases. And those factors will likely keep CPI Shelter from dropping to 0% like apartment rents have. But probably not enough to prevent continued moderation/normalization in CPI Shelter.
Comments