Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Is Rising Faster Than the CPI Says
Transcript
- Lucas: Luna, I want to start with a number that caught my eye in the May CPI data. All-items CPI came in at 334.0, up from 332.41 in April. That's a gentle increase, nothing dramatic. But core CPI — that's excluding food and energy — hit 336.1, which translates to an annual rate of 3.4 percent. That's the highest since October 2023. Luna: Right, and the headline the next day was basically 'inflation is sticky again.' But I bet a lot of people listening felt like that number didn't match what they see in their own lives. Lucas: Exactly. And there's a reason for that disconnect. The single biggest component of CPI is shelter — it makes up about a third of the index. And how the Bureau of Labor Statistics measures shelter is... well, it's complicated. It's also the main reason core CPI stayed elevated in May. Luna: So let's unpack that. How does the BLS actually measure rent? Because it's not just calling up apartment complexes and asking what they're charging new tenants. Lucas: No, it's the opposite. The CPI's shelter index is designed to measure the cost of housing for all renters, not just people who just signed a lease. So every six months, the BLS surveys a rotating panel of about 50,000 rental units. They ask the landlord or tenant what the current rent is for that specific unit. If the tenant has been there for three years and their rent went up 2 percent annually, that's what gets recorded. Meanwhile, the apartment across the hall might have just leased to a new tenant at a 10 percent premium. Luna: So the CPI captures the 'stock' of rents, while what's happening in the market — the 'flow' of new leases — can be much more volatile. Lucas: Precisely. And in the current environment, the gap between those two is unusually wide. According to data from Apartment List and Zillow, new-lease rents nationally were up about 6 to 7 percent year-over-year as of late spring 2026. But the CPI shelter index — which includes both rent of primary residence and owners' equivalent rent — was up about 4.8 percent over the same period. That's a gap of roughly 1.5 to 2 percentage points. Luna: Which means if you're a renter who moved in the last year, or whose landlord is marking you up to market rate, your personal inflation rate is significantly higher than the CPI says. Lucas: Exactly. And here's the thing — that gap tends to close over time. As more leases roll over, the stock of rents gradually catches up to the flow. But the catch-up can take 12 to 18 months. So when new-lease rents spike, the CPI shelter index lags behind by a year or more. And when new-lease rents cool — like they did in late 2023 and early 2024 — the CPI shelter index stays high for a while, because existing tenants are still seeing their rents go up. Luna: So the lag works in both directions. It smooths the data, but it also masks turning points. Lucas: Right. And for the Fed, that's a real challenge. The Fed looks at core PCE, which also includes shelter, and they know there's a lag. But the question is: how much of the recent stickiness in core inflation is real, and how much is just the lag from rent spikes in 2023 and early 2024 finally working its way through the index? Luna: Let's look at the actual numbers. In May 2026, the rent of primary residence index was up 4.7 percent year-over-year. Owners' equivalent rent — that's the hypothetical rent homeowners would pay if they were renting their own home — was up 4.9 percent. So combined, shelter inflation is running around 4.8 percent. Lucas: And that contributes about 2 percentage points to core CPI all by itself. If shelter inflation were running at a more normal 3 percent, core CPI would be around 2.2 percent — right near the Fed's target. So the entire inflation problem right now is essentially a housing problem. Luna: But is that actually comforting? Because housing costs aren't going to magically drop. New apartment construction has been strong in some markets, but there's also a shortage of affordable housing nationally. Lucas: It's a mixed picture. Multifamily construction boomed in 2022 and 2023, and a lot of those units are coming online now. In markets like Austin, Phoenix, and Atlanta, new-lease rents have actually been declining or flat. But in the Northeast and parts of the Midwest, supply is still tight. Nationally, the vacancy rate for rental apartments is around 6.5 percent, which is up from 5.5 percent a year ago. That suggests some easing, but not enough to bring rent growth down to pre-pandemic levels. Luna: So the Fed is in a tough spot. If they cut rates too soon, and the lag in shelter inflation masks real underlying pressure, they could reignite inflation. If they hold rates high too long, they risk tipping the economy into a recession — and we've already seen factory job cuts nearing financial crisis levels, according to that S&P report. Lucas: That's exactly the tension. The Fed's preferred inflation gauge, core PCE, came in at 3.4 percent in May — same as core CPI. And the effective federal funds rate is at 3.63 percent. So real rates — nominal rates minus inflation — are barely positive. The Fed hasn't cut since December 2025, and the market is pricing in a 50-50 chance of a cut in September. But if shelter inflation stays elevated, they might have to hold steady through the end of the year. Luna: And meanwhile, renters are feeling the squeeze. Let's talk about a specific example. I was looking at data from the Dallas Fed's Trimmed Mean PCE, which strips out the most extreme price movements. Even that measure is running above 3 percent. So it's not just shelter — there's some broad-based pressure. Lucas: But shelter is the main driver. And I think it's worth understanding how the BLS captures owners' equivalent rent, because that's a concept a lot of people find confusing. OER is essentially what homeowners would pay to rent their own home, net of utilities. The BLS surveys homeowners and asks them to estimate what their home would rent for unfurnished. That estimate is then used to impute a rent for the owner-occupied housing stock. Luna: So it's a hypothetical. And that makes it inherently noisy. Some studies have shown that OER tends to move similarly to actual market rents, but with a lag. And because it's based on homeowner estimates, it can be imprecise. Lucas: Right. And there's an ongoing debate among economists about whether OER should even be included in the inflation measure that guides monetary policy. Some argue that it's essentially a wealth effect, not a consumption cost. But the BLS includes it because, in theory, owning a home provides a flow of housing services that has an opportunity cost. If you're a homeowner, you could rent out your home and earn income. So that foregone rental income is a real cost. Luna: But for most people, it doesn't feel like a cost they're paying. And that's another reason the CPI feels off from lived experience. Lucas: Exactly. And that's the core of the disconnect. The CPI is designed to measure the average change in prices paid by urban consumers. But it's an average — it masks variation. If you're a renter in a hot market, your inflation rate could be 6 or 7 percent. If you're a homeowner with a fixed-rate mortgage and stable property taxes, your inflation rate might be 2 percent. The CPI is somewhere in between. Luna: So what can listeners actually do with this information? I mean, aside from feeling frustrated? Lucas: Well, for one thing, if you're negotiating a lease renewal, it helps to know what the market is doing. If new-lease rents in your area are flat or declining, you have leverage. You can point to comparable units and ask for a smaller increase. Landlords are often more willing to negotiate than you'd think, especially if vacancy rates are rising. Luna: That's a practical takeaway. And for anyone thinking about buying a home, understanding the shelter component of CPI can also help you gauge where mortgage rates might be headed. If shelter inflation stays hot, the Fed is less likely to cut. Lucas: Right. And that feeds into broader affordability. The other thing I'd say is: don't let the headline CPI number gaslight you. If your personal inflation rate feels higher, it probably is. The CPI is a useful benchmark, but it's not a perfect measure of your individual cost of living. Luna: Speaking of practical takeaways — you know, walking through the economy like this, I think a lot of listeners have told us that it helps these concepts click. And if that's been the case for you, and you'd like to support the show staying ad-free and independent, you can do that at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that makes a big difference for us. And we're grateful for every bit of support. Now, back to shelter inflation — I want to talk about one more nuance, which is the regional divergence. Because national averages hide a lot. Luna: Good point. Let's dig into that. Lucas: So let's look at two markets. In Miami, rents surged during the pandemic and have only recently started to plateau. According to the BLS's most recent data, the Miami-Fort Lauderdale area saw shelter costs rise about 6.2 percent year-over-year in May. Meanwhile, in the San Francisco Bay Area, shelter inflation was closer to 3.1 percent. That's a three-percentage-point spread. Luna: And that has huge implications for local economies. A family in Miami is dealing with a very different inflation environment than one in San Francisco, even though the national CPI treats them the same. Lucas: Exactly. And the BLS does publish regional CPI data, but it's not as widely reported. So if you live in Miami, your personal inflation rate could be well above the national average. And that might affect how you think about things like wage negotiations, budgeting, or even where to live. Luna: So the takeaway is: national CPI is a starting point, but you need to look at your local data. And also understand the lag in shelter. Lucas: Right. And I think that's a good place to leave it. The shelter component of CPI is the single biggest driver of inflation right now, and understanding how it works — and its limitations — can help you make sense of the headlines. Until next time. Luna: Thanks for listening.