Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Rent Is Still Driving Inflation Despite Cooling CPI
Transcript
- Lucas: Alright, let's talk about the inflation number that just won't quit. You look at the latest CPI reading — April 2026, headline at 332.4, up from 330.29 in March. That's about a 2.8 percent annual rate. Core CPI, stripping out food and energy, is running at about 3.3 percent. But there's one category inside that index that is still printing numbers that look like 2022. Luna: Shelter. I was just looking at the data — shelter costs are still rising at over 5 percent year over year. That's the single biggest weight in CPI, what, about a third of the index? Lucas: Exactly one third, roughly. And it's not just a big number — it's sticky. The Bureau of Labor Statistics measures shelter through two sub-components: rent of primary residence, which is what actual tenants pay, and owners' equivalent rent, which is what the BLS estimates homeowners would pay if they rented their own home. Both are running hot. Luna: And that's the piece that a lot of people feel every month when their lease renews, but the official number says something slightly different. Why the gap? Lucas: It's a measurement lag. The BLS surveys a rotating panel of rental units — about 50,000 units — but they only update rents every six months. So if the market spikes in January, that spike doesn't fully show up in CPI until maybe July or August. And we all know that during the pandemic, rents surged double digits in many metros. That wave is still washing through the official data. Luna: Right, so the CPI shelter number we're seeing today is really reflecting rental conditions from late 2025. And real-time indicators — like Zillow's Observed Rent Index or Apartment List — they've been showing rent growth slowing to maybe 2-3 percent this year. So there's this disconnect. Lucas: Exactly. And that's where the Fed's dilemma gets interesting. When Chair Powell looks at core PCE — the Fed's preferred gauge — that index weights shelter a bit differently, but it's still a big factor. The April core PCE came in at 129.6, up from 129.32, so about 2.8 percent annualized. Still above the 2 percent target. And the stickiness is partly because shelter lags are masking the true cooling. Luna: So if you strip out shelter, what does core inflation look like? Because there's a metric called 'supercore' or 'services ex housing' that the Fed watches. Lucas: Services ex housing — that's the one. It measures things like medical care, haircuts, car repairs. And that's actually been coming down. It's around 3.5 percent annualized, down from over 5 percent last year. So the Fed sees progress there. But shelter is like an anchor dragging the headline down more slowly. Luna: Speaking of what's working, you know what keeps this show ad-free and independent? It's listeners like you. If our conversations about inflation have made something click — like why your rent check feels disconnected from CPI — consider supporting the show. It's buy me a coffee dot com slash fexingo. Seriously, every bit helps us keep digging into the numbers without any corporate strings. Lucas: Yeah, it genuinely does. And it means we can spend time on these deeper dives instead of chasing clickbait. So if you're finding value, that's the place. Now, back to that shelter lag — one thing I want to highlight is that the BLS also releases a 'new tenant rent' index, which tracks rents for people who just signed a lease. That has actually been declining for several months. The problem is that only about 20 percent of renters move in any given year. Luna: So the majority of renters — the ones who renew — they're seeing smaller increases, but still increases. And that's what gets captured in CPI. The new tenant data might signal where things are headed, but it's not yet in the official numbers. Lucas: Precisely. And this is why the Fed can't declare victory on inflation yet. Even though real-time rent indicators are cooling, the official CPI shelter component will keep printing elevated numbers for maybe another six months. That delays the signal that inflation is sustainably at 2 percent. Luna: And the Fed funds rate is at 3.63 percent effective right now. Markets are pricing in a cut maybe later this year, but if shelter stays sticky, that cut could get pushed into 2027. Lucas: Right. And we've seen Fed speakers recently — Kashkari and Goolsbee — both saying inflation fight takes priority. Goolsbee specifically noted that energy inflation is more persistent than expected, partly due to the Iran situation adding $450 per household annually on gas. But shelter is the bigger structural issue. Luna: Because energy prices can fluctuate with geopolitics, but housing is tied to supply and demand dynamics that take years to shift. We're still underbuilding housing in most major metros. Lucas: Absolutely. The National Association of Realtors estimates we're short about 4 million homes. And while apartment construction has picked up, it's mostly in the luxury segment. Affordable rental supply is still tight. So even if demand cools, rents don't fall — they just increase more slowly. Luna: So for the average listener, what's the takeaway? Should they expect their rent to keep going up even if CPI says inflation is moderating? Lucas: I think the honest answer is yes, for at least the next year. If you're renewing a lease, expect a 3 to 5 percent increase. If you're moving to a new apartment, you might have more negotiating power — vacancy rates have ticked up in some markets. But the structural shortage means rents aren't going down. Luna: And that's the reality the Fed is grappling with. They can't build houses, they can only influence demand through interest rates. And higher rates actually make it harder to build because construction loans get more expensive. Lucas: Exactly. It's a classic Catch-22. The Fed tightens to cool inflation, but that tightness chokes off the housing supply response. So shelter inflation stays elevated longer. It's one reason some economists argue the Fed should focus more on core services ex housing and less on headline. Luna: But politically, that's tough. Because voters feel shelter costs every day. The headline is what they see on the news. Lucas: And that's the tension. The Fed's dual mandate is price stability and maximum employment. If they ignore shelter because of a measurement lag, they risk losing credibility. But if they overreact to a lagging indicator, they could tighten too much and cause a recession. Luna: So what's the path forward? Do you see any policy changes that could help bridge this gap? Lucas: One idea that's gained traction is for the BLS to incorporate more real-time data — like from Apartment List or Zillow — into the CPI shelter calculation. That would reduce the lag. But it's a huge methodological change, and the BLS is cautious about swapping out their survey for private data sources. Luna: Makes sense. You don't want to create volatility in the index just because one data provider changes their methodology. Lucas: Exactly. So for now, we're stuck with this lag. And it means that even as inflation overall cools, the shelter component will keep the headline from dropping too fast. The Fed will probably hold rates steady through the summer, watch the data, and maybe cut in September if they see enough progress in services ex housing. Luna: And if they don't cut? What's the risk? Lucas: The risk is that the lag in shelter data fools them into thinking inflation is still too high, and they keep rates restrictive for too long. That could tip the economy into a recession. But the alternative — cutting too early and having inflation re-accelerate — is equally dangerous. It's a tightrope. Luna: So for listeners, the key is to watch not just the headline CPI number, but the shelter component. If that starts to decline meaningfully, that's when you'll know the Fed might actually start cutting. Lucas: Exactly. And we'll be here to track it. Next week, I want to look at something related: how commercial real estate is affecting the banking sector and whether that could spill over into your mortgage rates. Luna: That sounds like a good one. Until then, keep an eye on your rent renewal notice.