Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Is Falling While Your Hotel Room Isnt
Transcript
- Lucas: So here's a puzzle: the June CPI data dropped last week, and shelter costs — which make up about a third of the index — finally showed a slight decline. But if you've tried to book a hotel room this summer, you know prices are anything but down. Luna: Yeah, my family looked at a weekend in Nashville and the rates were eye-watering. Meanwhile, my landlord just offered me a two-month free concession to renew my lease. What is going on? Lucas: That is exactly the disconnect we're going to dig into. Rents and hotel rates are both 'shelter' in the broad sense, but their markets have completely different drivers right now. Let's start with rents. Lucas: The CPI shelter component ticked down to 332.6 in June from 333.98 in May. That's small, but it's the first meaningful drop in over a year. And it's being driven by a wave of new apartment supply, especially in the Sun Belt. Luna: Right, places like Austin, Phoenix, Atlanta — they've been building like crazy. I saw a stat that Austin alone added something like 30,000 new units last year. Lucas: More than that — about 35,000. And when you flood the market with supply, landlords have to compete. Effective rents in Austin are actually down about 4 percent year-over-year. Phoenix is down around 3 percent. Landlords are throwing in concessions — free months, waived fees — just to keep occupancy up. Luna: So the CPI is finally catching that. But hotels are a whole different animal. Lucas: Totally different. Hotel supply hasn't grown nearly as fast — construction costs are high, financing is expensive, and a lot of projects got shelved during the pandemic. So supply is tight. Meanwhile, demand is surging. Lucas: You've got revenge travel still going strong, plus big events — the World Cup just gave bars and restaurants a boost, and hotels in host cities saw a huge spike. Nationally, hotel revenue per available room — RevPAR — is up about 6 percent year-over-year. Luna: And that's despite what we're hearing about consumers pulling back. The Fed's Beige Book even mentioned that restaurants and hotels are seeing strength even as other retail weakens. Lucas: Exactly. So you have two sides of the same 'shelter' coin diverging. One is driven by supply-side relief — more apartments coming online. The other is driven by demand-side pressure — more people wanting to travel and limited rooms. Lucas: And here's where it gets interesting for the inflation picture. The Fed watches shelter costs closely. If rents keep easing, that should help bring overall CPI down. But hotel prices are a wildcard — they're more volatile and can spike on events. Luna: So which one matters more for the Fed's decision-making? Rents, because they're stickier and affect more people, right? Lucas: Right. Hotel rates are a tiny slice of the CPI — less than 1 percent. Rents and owners' equivalent rent are the big ones. So the Fed is probably more encouraged by the rental data. But if hotel prices stay elevated, it could keep overall services inflation from falling as fast as they'd like. Luna: And that's why the 10-year breakeven inflation rate ticked up to 2.28 percent recently. The market isn't convinced inflation is dead yet. Lucas: Good point. That's the bond market saying, 'We see some lingering pricing pressure.' And the hotel market is part of that puzzle. Lucas: Speaking of things that make you think — if walking through the economy with us has made something click, we'd love if you considered supporting the show. It's ad-free and listener-supported. If today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, honestly, every little bit helps us keep digging into these topics without any sponsor pressure. We really appreciate it. Lucas: Now, back to that hotel market. One thing that might surprise listeners is how much of the hotel price increase is actually coming from limited-service hotels — think Holiday Inn Express, not the Ritz. Business travel is back, but companies are sending employees on tighter budgets, so those mid-tier properties are seeing the biggest occupancy gains. Luna: That makes sense. My company just cut our travel policy to hotels under $200 a night. So we're all crowding into the same limited pool. Lucas: Exactly. And that's pushing rates up for everyone. Meanwhile, luxury hotels are actually seeing softer demand — high-end consumers are still spending, but they're shifting to experiences like international travel, which takes some pressure off domestic luxury properties. Lucas: So the rental market and hotel market are telling us different things about the consumer. Rents say: there's enough supply to keep prices in check. Hotels say: people still want to get out and spend, but they're price-sensitive. Luna: And both have implications for the Fed's next move. With the Fed funds rate stuck at 3.63 percent, they're waiting for clearer signals. This split in shelter costs must be a headache for them. Lucas: It is. If you're a Fed watcher, you're parsing every data point. Kevin Warsh recently homed in on three key phrases in Fed communications — the market is parsing every word. But ultimately, the shelter data will be a big factor. Luna: So for the average listener: if you're renting, you might see some relief in the next lease renewal. If you're booking a hotel, don't expect a bargain anytime soon. Lucas: Correct. And that's the takeaway: the same category — shelter — can move in opposite directions depending on the sub-market. For renters, it's a supply story. For travelers, it's a demand story. And for the Fed, it's a conundrum. Luna: Alright, thanks Lucas. That's a neat explanation of a messy reality. Lucas: Thanks Luna. Until next time.