Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How the Fed Ignores Your Actual Rent Increase
Transcript
- Lucas: So the big headline last week was core PCE hitting 3.4 percent — the highest since 2023. But there's a number buried inside that report that tells a completely different story about what renters are actually feeling. Luna: The shelter line in PCE? Lucas: Exactly. Shelter is roughly a third of the core PCE basket. And in the May data, shelter inflation was running at about 4.2 percent year-over-year. That sounds bad, but it's actually down from 5 percent a year ago. Meanwhile, if you look at what landlords are actually asking for on new leases — Zillow's Observed Rent Index — that was up 6.8 percent year-over-year in April. Luna: So there's a two-and-a-half point gap between what the official data says and what the market is actually doing. That's not a rounding error. Lucas: It's structural. The BLS — the Bureau of Labor Statistics — measures rent for the CPI by surveying tenants about what they're currently paying. That includes people who've lived in the same unit for years under a fixed lease. If you renewed in February 2025 with a 3 percent increase, you're still paying that rate in May 2026. The CPI averages you in with someone who just signed a new lease at a 10 percent premium. Luna: And the longer you stay, the more you drag down the average. Meanwhile, anyone moving is getting hammered. Lucas: Right. The BLS methodology is designed to measure the cost of shelter for all renters, not the cost of finding a new apartment. But the Fed cares about inflation momentum. And new-lease rents are a leading indicator. If today's new-lease rents are rising at 7 percent, tomorrow's renewal letters will reflect that. The CPI shelter number is essentially looking in the rearview mirror. Luna: I moved to Austin two years ago, and my renewal notice last month was a 12 percent increase. I called around and comparable units were even higher. Yet the CPI for Austin metro shows shelter up maybe 4 percent. I felt like I was taking crazy pills. Lucas: That's the disconnect. And it's not just anecdotal. RealPage data on multifamily properties shows that for units where the tenant renewed, average rent increases in Q1 2026 were 5.2 percent. But for units that turned over to a new tenant, the increase was 9.8 percent. The gap is almost five points. Luna: So the Fed is looking at a 4.2 percent shelter number and thinking, 'Okay, this is slowly coming down.' But if they used new-lease data, they'd see shelter inflation is actually accelerating. Lucas: Exactly. And that matters for policy. The Fed's dual mandate is price stability and maximum employment. If they underestimate shelter inflation, they might keep rates too low for too long, which lets the rest of the economy run hot. The core PCE at 3.4 percent is already above their 2 percent target. But if shelter is actually contributing more than the data says, the real inflation rate is higher. Luna: Why don't they just switch to new-lease data? Is it a data quality issue? Lucas: Partly. The BLS has a sample of about 50,000 rental units that they survey every six months. It's a consistent panel. New-lease data from Zillow or Apartment List covers millions of listings, but it's not a controlled sample — it's whatever is listed at that moment. Also, the CPI is meant to track the cost of living for all consumers, not just movers. More than 60 percent of renters have been in their unit for over a year. The CPI reflects their experience. Luna: So the official number is accurate for what it's trying to measure. It's just not the number that matters for predicting where inflation is going. Lucas: Bingo. And that creates a blind spot. Fed Chair Powell has acknowledged this in past press conferences — he's said they look at market-rate rent data from private sources. But the actual inflation target is based on PCE, which uses the same laggy shelter methodology. So the Fed's hands are somewhat tied by their own framework. Luna: And the market knows it. Look at the 10-year breakeven inflation rate — it was 2.24 percent at the end of June, up from 2.22. That's not a huge move, but it suggests bond traders think inflation is sticky. If shelter is actually hotter than the data shows, that stickiness makes sense. Lucas: Let's talk about what this means for the average renter. If you're in a rent-controlled or stabilized unit, your increase is capped. But if you're in the roughly 40 percent of rental housing that's market-rate and not covered by rent control, your landlord can raise it as much as the market will bear. And with vacancy rates nationally at 4.2 percent — below the 5 percent equilibrium — landlords have pricing power. Luna: That's the other factor. Low vacancy means fewer options, which means more people renew even with a big hike, rather than pay moving costs and a higher deposit elsewhere. Landlords know that. Lucas: So the CPI shelter number might not come down quickly. Even if new-lease rent growth slows, it takes time for that to filter into renewals. And as long as vacancy stays low, landlords can keep pushing. The Fed has acknowledged that shelter is the stickiest component of inflation. But they're looking at the stickiness through a rearview mirror, not the windshield. Luna: I wonder if there's a policy fix. Could the BLS start publishing a separate new-lease index as an experimental statistic? That would at least give the public and policymakers a clearer picture. Lucas: They could. The BLS already publishes experimental indexes for online prices. A new-lease rent index would be a natural extension. But there's resistance — partly because it would create confusion if the official CPI and the experimental one diverge. The BLS values consistency. Still, I think there's a strong case for it. The Fed and the public deserve to know what's happening in real time. Luna: And if you're a renter listening, what do you do with this info? Other than feel frustrated. Lucas: Negotiate. Look at market-rate data for your area — sites like Zillow or Rent.com list asking rents. If your renewal is higher than comparable units, you have leverage. Landlords would rather keep a good tenant than lose money on a vacancy. Also, consider the timing. If supply is increasing in your area — many Sun Belt markets are adding apartments — rents may soften. But in tight markets, the best strategy is to lock in a longer lease to cap increases. Luna: It's a tough environment. The rent is too damn high, as the saying goes. And the data says it's not as high as it really is. Lucas: Before we wrap, I want to take a quick moment. This show is ad-free and listener-supported. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. Even a small contribution helps us keep digging into numbers like this rent gap. So thanks if you do. Lucas: Alright, back to the data. The bottom line is that the inflation you feel at rent renewal time is likely higher than what the government reports. And that gap has real consequences — for the Fed's policy decisions, for your budget, and for the broader economic picture. We'll keep watching it. Luna: And hopefully next time, the numbers will be closer to reality. Lucas: Here's hoping. That's it for today. We'll be back tomorrow with another angle.