Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Is Still Rising Even as Inflation Cools
Transcript
- Lucas: So the April CPI came in at 332.4 — up from 330.29 in March. Headline inflation is cooling, core is cooling, the ten-year breakeven rate has dropped to 2.39 percent. Market-implied inflation expectations are coming down. And yet — your rent probably hasn't budged. Luna: Mine definitely hasn't. And I see this question constantly from listeners: if inflation is falling, why is my rent still going up every single year? Lucas: Right. And the answer lives inside this weird measurement issue in the CPI. Let me give you a number: shelter makes up about one-third of the overall CPI basket. It's the single biggest component. And the way the Bureau of Labor Statistics measures shelter inflation is not the way you experience rent. Luna: They're not just calling your landlord and asking what you paid this month, are they? Lucas: No. They use two surveys. One is the Rent of Primary Residence index — that tracks actual market-rate leases for tenants. The other is Owners' Equivalent Rent, which asks homeowners: if you rented your own home, what do you think it would rent for? Both of these have a lag built in. Luna: How long a lag? Lucas: About six to twelve months. The BLS samples a panel of rental units and surveys them every six months. So when market rents spiked in 2021 and 2022, the CPI shelter numbers didn't peak until early 2023. Similarly, when market-rate rents started flattening in late 2023, shelter CPI kept rising for most of 2024. Luna: So the CPI is basically always looking in the rearview mirror on housing. Lucas: Exactly. And in the current cycle, we're seeing that lag work both ways. The real-time data from Apartment List and Zillow shows asking rent growth has slowed significantly over the past year. But the government's shelter CPI is still running at around four and a half percent year-over-year as of April. Luna: So that four and a half percent is yesterday's news. The actual rent someone signing a lease today is paying might be much lower. Lucas: Right. And that creates this weird tension. The Fed looks at core CPI, which weights shelter heavily, and sees inflation still above target. But if you strip out the lag effect, current market conditions suggest shelter inflation is actually closer to two percent. That's a big gap. Luna: That would change the policy conversation entirely. Kevin Warsh gets sworn in as Fed chair on Friday — he's inheriting an inflation picture that might be softer than the official numbers show. Lucas: It's a good point. The breakeven inflation rate falling to 2.39 percent suggests bond markets already believe inflation is headed lower. But the shelter lag means the CPI data the Fed will see over the next few months may still look sticky, even as the real economy has already adjusted. Luna: So what do you tell a listener whose rent just went up five percent? 'Don't worry, the data is just slow' — that's cold comfort. Lucas: It is. And I won't sugarcoat it. Here's the thing: the rent increase you experienced this year was set by market conditions twelve to eighteen months ago. If you want to know what your rent might do next year, look at what's happening to new leases in your city today. In markets like Austin and Phoenix, new lease prices have actually fallen. In New York and Miami, they've plateaued. But in much of the Midwest and South, they're still climbing. Luna: So the national average masks huge regional variation. That's why listeners get confused — their own experience doesn't match the headline. Lucas: One more layer: Owners' Equivalent Rent. That's the measure for homeowners, and it's even more abstract. The BLS asks, 'If someone rented your home, how much would they pay?' It's a hypothetical. And homeowners tend to anchor that number to their own mortgage or property taxes, not to the actual rental market. So OER tends to be stickier and slower to turn. Luna: Which matters because OER is actually the bigger piece within shelter CPI — I think it's about two-thirds of shelter spending. Lucas: You're right. Roughly 24 percent of the entire CPI basket is OER. So if that number is slow to reflect falling market rents, it artificially props up core inflation. Luna: If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Lucas: Yeah, we don't run ads — that's a deliberate choice. If you want to support that, buy me a coffee dot com slash fexingo is the place. Luna: Alright. So let's talk about what happens next. If the lag starts to unwind over the summer, we could see shelter CPI drop meaningfully by the fourth quarter. Lucas: That's the bullish case for inflation moderating without a recession. But there's a risk: if the labor market stays tight and wages keep rising, landlords may have pricing power to push rents higher again. The Fed's job is to calibrate how much of the cooling is real and how much is just a measurement artifact. Luna: And Warsh comes in with a reputation for being more hawkish than Powell was. If he focuses on the sticky official CPI instead of the softer real-time data, he might keep rates higher for longer. Lucas: Exactly. The effective fed funds rate is at 3.64 percent right now. The market is pricing in a cut later this year, but if shelter inflation stays elevated in the CPI through July, that cut becomes less certain. Yardeni even said last week the Fed will have to raise rates in July to appease bond vigilantes. Luna: That's a pretty extreme view. But it shows how much hinges on this one data point. Lucas: It really does. So for the listener wondering why their rent is still going up: part of it is real — demand for housing is still strong in many markets. But part of it is also the statistical noise of how we measure housing costs. The official inflation number is not lying, but it is lagging. Luna: And if the lag catches up, we could see a surprisingly benign inflation print in the back half of the year. That would change the whole macro picture. Lucas: And it would validate what many consumers have been feeling: that the worst of inflation is behind us, even if it doesn't show up in the official numbers until later. We'll be watching the May CPI release next month to see if the shelter numbers finally start turning. Luna: We'll have you covered. Thanks, Lucas. Lucas: Thanks, Luna.