Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Check Is Getting Zillowed
Transcript
- Lucas: So the April CPI came in at 332.4 — up from 330-point-something the month before. Core CPI, which strips out food and energy, hit 335.4. And the headline numbers actually look okay-ish, right? Inflation is down from where it was, but there's this one stubborn component that just won't budge. Luna: Shelter. Every time we talk about inflation feeling worse than the data, we end up circling back to rent and owners' equivalent rent. Lucas: Exactly. Shelter is about a third of the CPI basket. And lately, it's been contributing something like 60 to 70 percent of the core inflation reading. So even if energy prices cool, even if used cars finally ease, shelter keeps the index elevated. Luna: And we've done episodes on why rent feels detached from CPI — the lag, the sampling, the way the BLS measures it. But I want to zoom in on something I've been noticing. There's a new player in how rents actually get set. Lucas: Zillow. Luna: Yeah. Specifically, the Zillow Zestimate for rentals. It started as a tool for renters to see what a fair price might be. But property managers and landlords are now using it as a benchmark — and in some cases, feeding it directly into their pricing algorithms. Lucas: It's like the Zestimate became a self-fulfilling prophecy. If Zillow says the market rent for a two-bedroom in your zip code is $2,200, and the landlord's software is pulling that number, then every lease renewal in that building gets repriced to $2,200. And then that transaction data flows back into Zillow's model, confirming the estimate was right. Luna: It's a feedback loop. And it's happening at scale. Zillow isn't the only one — there's RealPage, Yardi, a bunch of property management platforms that use algorithmic pricing. But Zillow's consumer-facing tool is the one that normalizes the number in the renter's mind. Lucas: So you go to Zillow, you see the Zestimate, you think 'okay, that's the going rate.' And when your landlord offers a renewal at that exact number, you're less likely to push back. The algorithm trains both sides of the market. Luna: And this is where it gets tricky for CPI. The Bureau of Labor Statistics collects rent data from surveys of tenants and landlords. But the rents that are actually being transacted are increasingly set by these algorithmic tools. So if Zillow's model says rents are going up 5 percent, and enough landlords adopt that, the actual market moves — and CPI eventually picks it up. But there's a lag. Lucas: Right. CPI shelter inflation has been running hot for months. But the question is: is it capturing the algorithmic acceleration? Because if the algorithms are tightening the feedback loop, the lag might be getting shorter — or the spike might be getting sharper. Luna: Exactly. And we're seeing signs of that. The April CPI showed shelter still climbing at an annualized rate above 5 percent. Core services less energy — which is heavily influenced by shelter — stayed sticky. The Fed looks at that and thinks, 'we can't cut rates yet.' Lucas: Let me tie this to something concrete. Zillow's rental manager product lets landlords list properties, screen tenants, collect rent — and it includes a recommended price based on the Zestimate. In their 2025 annual report, they said the rental manager business grew something like 20 percent year over year. More landlords are plugging into their ecosystem. Luna: Meanwhile, the effective Fed funds rate is at 3.63 percent. The Fed has been holding steady, partly because shelter inflation isn't cooling. And if algorithmic pricing is creating a floor under rents, the transmission mechanism of monetary policy might be slower on this front. Lucas: It's wild to think that a real estate listing website's algorithm could be influencing the Fed's rate path. But that's the world we're in. Luna: And that's actually a good segue to something I wanted to mention. You know, we talk about these connections every day on this show — how a number on a screen ripples through the economy. And a handful of listeners have said that kind of thing really clicks for them. Lucas: Yeah, we get messages like 'I never thought about how Zillow affects my rent' or 'your explanation of CPI lags finally made sense.' And the thing is, we're able to keep doing this — ad free, no sponsors — because some of those listeners chip in a few bucks a month through Buy Me a Coffee. Luna: It's at Buy Me a Coffee dot com slash fexingo. And honestly, it's what keeps the lights on. We don't have ads, we don't sell data, we just talk through the numbers. If that's valuable to you, even five bucks helps. Lucas: Alright, back to the algorithm. So we have this feedback loop — Zestimate influences market rents, market rents feed back into Zestimate. But here's the thing: Zillow doesn't own the rental units. They're just providing the signal. So how much responsibility do they bear if that signal inflates prices? Luna: That's the billion-dollar question. Literally — Zillow's market cap is around 13 billion. And there have been class-action lawsuits against algorithmic pricing in housing, mostly focused on property management software like RealPage's YieldStar. The argument is that it facilitates tacit collusion among landlords. Lucas: But Zillow is different. They're not setting prices for a specific building. They're providing a public estimate. Yet because that estimate is perceived as authoritative, it becomes a coordination point. If every landlord in a neighborhood uses Zillow as their reference, they all converge on the same number without ever talking to each other. Luna: And that can keep rents higher than a competitive market would allow. Because if one landlord decides to undercut the Zestimate, they might worry they're leaving money on the table. But if they all follow Zillow, they all stay elevated. Lucas: So what does this mean for CPI going forward? The Bureau of Labor Statistics is aware of this. They've been researching alternative data sources, including online listings. But they haven't incorporated Zillow data directly. Their sample is still based on surveys. Luna: And surveys have their own biases. They capture what tenants pay, but with a lag — especially for renewals. A tenant who signed a lease two years ago might be paying significantly less than the current Zestimate. So CPI shelter might be understating the pain for new renters. Lucas: There's a split in the data. The rent index in CPI is up about 5.2 percent year over year as of April. But Zillow's own observed rent index — which tracks new leases — shows something like 6.5 percent. That gap is real. Luna: And if you're moving or renewing this spring, you're feeling the 6.5, not the 5.2. That's why inflation feels personal. Your personal inflation rate depends on what's changing in your life. Lucas: Let's zoom out for a second. The broader economy is sending mixed signals. Job openings surged to 7.6 million in April — highest in two years. Private payrolls added 122,000 in May, stronger than expected. So the labor market is still tight. And that gives workers some bargaining power, but it also gives landlords confidence they can raise rents. Luna: And then you layer on the geopolitical stuff — the Iran conflict pushing energy costs higher, fresh tariffs proposed on 60 economies. All of that feeds into inflation expectations. And if rent stays sticky, the Fed's job gets harder. Lucas: Right. The effective rate is at 3.63. The market is pricing in maybe one cut this year. But if shelter doesn't cool, the Fed might not move at all. And the Zillow feedback loop is one reason shelter might not cool. Luna: So what can renters do? I mean, besides hoping the algorithm breaks. Lucas: Short of that, you can negotiate. If you know the Zestimate for your unit, you can push back if the renewal is above it. Landlords are using data, so you should too. There are tools that track rent trends in your building. And if you're willing to move, loyalty discounts are shrinking — new tenant concessions are getting rarer. Luna: But at a systemic level, this is about data and market design. If everyone uses the same benchmark, that benchmark becomes a price-fixing mechanism. Regulators are starting to look at it. The DOJ has been investigating RealPage. Zillow might get more scrutiny. Lucas: And that's the story. The numbers in CPI are real, but the process that generates them is being automated in ways the BLS hasn't fully caught up with. For now, shelter inflation is the rock in the Fed's shoe. And Zillow's algorithm is a big reason that rock isn't getting any smaller. Luna: So the next time you see your rent go up, check the Zestimate. It might tell you more about where that number came from than your lease does. Lucas: Good place to leave it. Thanks, Luna. Luna: Thanks, Lucas.