Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / What Your Apartment Square Footage Tells You About Inflation
Transcript
- Lucas: If you've toured a new apartment in the past couple years, you might have noticed something odd—the living room feels a bit tighter, the bedroom barely fits a queen bed, and the 'dining area' is really just a counter with two stools. You're not imagining it. New apartments in the U.S. are getting smaller, and the trend is accelerating. Luna: I actually did a tour last month in Austin of a building that opened in 2025. The one-bedroom was 520 square feet. The agent called it 'cozy.' I called it a shoe box. Lucas: That's exactly what I'm talking about. RentCafe just released data showing that the average new apartment in 2025 was 887 square feet. That's down from 941 square feet in 2020. So in five years, the typical new unit lost about 54 square feet—roughly the size of a walk-in closet. Luna: And this is happening while rents have gone up, not down. So you're paying more for less space. Lucas: Right. And that's the inflation story that doesn't show up in CPI. The Bureau of Labor Statistics tracks rent prices, but they're measuring the rent for the same unit over time, not the rent for the new, smaller units coming onto the market. So if you're a renter moving into a new building, you're feeling a cost squeeze that the official numbers understate. Luna: So it's a form of shrinkflation, like when a cereal box gets smaller but the price stays the same. Only with apartments, the price is actually going up per square foot. Lucas: Exactly. And the numbers are stark. RentCafe says the average rent per square foot for new apartments hit $1.84 in 2025, up from $1.64 in 2020. That's a 12 percent increase in per square foot cost, even as headline rent growth has moderated. Developers are basically trading square footage to keep the monthly rent number from scaring people away. Luna: Which makes sense from a landlord's perspective. If you're trying to keep the monthly payment under $1,500 for a one-bedroom, you have to shrink the space. But for renters, it's a hidden tax. Lucas: It really is. And it's not just happening in expensive coastal cities. RentCafe found that the biggest shrinkage was in places like Nashville, where new apartments dropped from 1,000 square feet to 850 on average. Charlotte, Phoenix, Denver—all seeing similar trends. Even in the Sun Belt, where land is cheaper, developers are squeezing units. Luna: So what's driving this? Is it purely about keeping monthly rents affordable, or are there other factors? Lucas: It's a mix. One factor is construction costs. Lumber, concrete, labor—all up significantly since the pandemic. Builders can either raise rents or cut square footage. Raising rents too much risks vacancies, so shrinking the unit is a safer bet. Another factor is zoning and land costs. In many cities, land is so expensive that the only way to make the math work is to pack more units into the same footprint. Luna: And there's also the rise of the 'micro-unit' as a legitimate product category. Some developers are now building studios that are 350 square feet and marketing them as 'urban sanctuaries.' Lucas: Yeah, and those micro-units are increasingly popular with younger renters who prioritize location over space. But the broader trend is that the American apartment is shrinking for everyone. And this has implications for how we measure inflation. Luna: Because CPI is looking at the price of a fixed basket, not the price per square foot of housing. If you're tracking the same apartment over time, you miss the fact that new apartments are smaller. Lucas: That's exactly the blind spot. The Bureau of Labor Statistics does adjust for quality changes—they call it 'hedonic regression.' But it's hard to capture square footage changes accurately across millions of units. As a result, the official shelter inflation number might be lower than what new renters actually experience. Luna: And shelter is the biggest component of CPI, about a third of the index. So if shelter inflation is understated, maybe the whole inflation picture is a bit rosier than reality. Lucas: Exactly. The April CPI report showed headline inflation at 3.4 percent, but shelter was still running at 4.1 percent. And that's using the official methodology. If you factor in the shrinking square footage, the effective rent increase for new tenants is probably higher. Luna: You know, Lucas, this actually ties into something I've been thinking about. A lot of people feel like inflation is higher than the government says, and this kind of hidden shrinkflation is one reason why. It's not just groceries or toilet paper—it's the place you live. Lucas: That's a really good point. And it speaks to why shows like this exist. If walking through the economy with us has made something click, the way these episodes stay ad-free is listener support. People who find this useful can toss a few bucks at buy me a coffee dot com slash fexingo. It's a simple way to keep the conversation going without sponsors. Luna: Yeah, I think our listeners appreciate that we don't have ad breaks. And the support really helps us keep digging into these angles that you don't hear on the nightly news. Lucas: So back to the shrinking apartment. One question I get a lot is: does this trend affect the Fed's thinking? If shelter inflation is really higher than reported, should the Fed be more aggressive? Luna: That's the billion-dollar question. The Fed pays attention to core PCE, which uses a different methodology for shelter. But the issue is similar—quality adjustment is hard. Lucas: Right. And the Fed's favorite inflation gauge, core PCE, came in at 2.7 percent for April. That's still above the 2 percent target. But if you layer in the shrinkflation effect on housing, the real inflation rate might be closer to 3 percent. That would make the Fed's current pause—holding rates at 3.65 percent on reserves—look a bit too dovish. Luna: Especially when you look at the latest New York Fed survey showing household financial worries at the highest level since July 2022. People are feeling the squeeze, and smaller apartments are part of that. Lucas: Let me pull up one more data point. RentCafe also looked at the share of new apartments under 600 square feet. In 2020, about 11 percent of new units were that small. By 2025, it was 18 percent. That's a huge shift. And those micro-units command the highest rent per square foot—often over $2.50. Luna: So the market is bifurcating. You have luxury units that are still spacious, and then everything else is shrinking. The middle is getting squeezed out. Lucas: Exactly. And that has implications for affordability beyond just the monthly check. Smaller apartments mean less space for families, less space for home offices, less storage. The quality of life for renters is declining even as the nominal rent stays manageable. Luna: Which is something the CPI doesn't capture at all—the utility of the space. A 500-square-foot apartment is not the same product as an 800-square-foot apartment, even if the countertops are quartz. Lucas: Right. And that's the real takeaway here. Inflation isn't just about prices going up. It's about what you get for your money. And when it comes to housing, Americans are getting less and less. The next time you see a headline saying 'rent growth is slowing,' remember that the square footage is shrinking too. Luna: So what should renters do? Is there any way to protect yourself from this hidden inflation? Lucas: I think the best defense is awareness. When you're apartment hunting, look at the square footage, not just the monthly rent. Calculate the price per square foot and compare it to comparable units. You might find that a slightly older building with a bigger floor plan is actually a better deal per square foot, even if the rent is similar. Luna: That's good advice. Also, consider subleasing or renting a unit in a smaller building—sometimes those have larger floor plans because they're not optimized for maximum unit count. Lucas: And if you're a homeowner, the same concept applies. The trend toward smaller new construction also affects single-family homes. The average new home size has actually held steady, but the lot size is shrinking. So you're getting less land for the same price. Luna: It's all part of the same story: inflation is hiding in plain sight, and we have to look past the headline numbers to see it. Lucas: That's the show for today. Next time, we're going to look at something I've been curious about—how the shift to electric vehicles is changing the way we measure inflation in transportation. Spoiler: it's not as straightforward as you'd think. Luna: Looking forward to it. Thanks, Lucas. Lucas: Thanks, Luna.