Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Your Landlord Is Raising Rent More Than CPI Says
Transcript
- Lucas: So the May CPI came out last month — all items at 334.0, core at 336.1. Headline inflation is cooling, right? But if you're a renter, you're probably thinking, 'Cooling where, exactly?' Luna: Yeah, I just got my lease renewal notice. Up 7 percent. And the CPI says shelter inflation is running about 4.2 percent annualized. That gap is huge. Lucas: That gap is the whole story today. The CPI's shelter component is the single biggest weight in the index — about a third of the basket. But it's also the most methodologically... let's say 'creative' component. Luna: Creative how? I thought the BLS just surveys landlords and tenants. Lucas: They do — but here's the catch. The CPI doesn't measure what you actually pay on your lease. For renters, it uses 'rent of primary residence' — that's from a survey of about 50,000 rental units. But for homeowners — which is about 65 percent of households — they use 'owners' equivalent rent.' That's literally the BLS asking homeowners, 'If you were renting your home, what do you think it would rent for?' Luna: Wait — so the inflation number that the Fed watches for housing is partly based on what people imagine they'd pay? Lucas: Exactly. And it gets weirder. The BLS samples units on a six-month rotating panel. So a new lease signed today takes up to six months to fully enter the index. By the time CPI captures a rent increase, the market has already moved on. Luna: So the CPI shelter number is basically a lagging indicator of what renters actually experienced three to six months ago. Lucas: Right. And in a fast-moving rental market — like we've had since 2021 — that lag makes the CPI look artificially low. Zillow's Observed Rent Index, which tracks actual new leases on its platform, shows national rents up about 6.8 percent year over year as of May. CPI shelter? 4.2 percent. Luna: So there's a roughly two and a half percentage point gap. That's not noise — that's a systematic undercount. Lucas: It is. And the Fed uses the PCE price index as its primary inflation gauge, not CPI. But PCE's shelter component uses CPI's rent data as a building block. So the same lag and imputation issues flow through. Luna: Core PCE hit 3.4 percent in May, highest since October 2023. If shelter were measured in real-time, would that number be even higher? Lucas: Absolutely. Economists at the San Francisco Fed estimated last year that if you replaced CPI's lagged rent with a market-based measure like Zillow's, core PCE would have been about 0.3 to 0.4 percentage points higher over the prior twelve months. That's not trivial when the Fed is trying to get inflation down to 2 percent. Luna: So the Fed is making policy decisions — rate cuts, pauses — based on an inflation metric that understates housing costs by maybe half a point. That seems like a big deal. Lucas: It is a big deal. And it's not just academic. Think about what that means for renters. Your rent check goes up 7 percent, but the official narrative says housing inflation is 4 percent. You feel like you're being gaslit. Luna: Or you start to distrust the data entirely. And that's dangerous for the Fed's credibility. Lucas: The BLS knows about this. They've been experimenting with a 'new tenant rent' index that captures only units with new occupants — much more responsive. But they haven't adopted it for the official CPI. Partly because it's volatile, partly because changing methodology mid-stream is a nightmare for continuity. Luna: Let's talk about why this gap persists. Is it just the survey lag, or is there something structural? Like, landlords are raising rents faster on new tenants than on existing ones? Lucas: That's exactly it. The BLS survey captures all rental units — including tenants who've been in place for years with small annual increases. But new leases are resetting at market rates. In 2025 and 2026, with vacancy rates still tight in many Sun Belt cities — think Phoenix, Tampa, Nashville — new lease growth has been running 8 to 10 percent. Existing tenants get 3 to 5 percent bumps. The CPI averages them together, so it underweights the pain for anyone who moves. Luna: And more people are moving — for jobs, for family, because they have to. So the CPI is missing a growing share of actual rent transactions. Lucas: Precisely. The BLS sample is designed to measure the cost of shelter for a representative household over time. But if you're a household that moves every two years, you're not representative — you're experiencing higher inflation than the average. The index is biased toward the stay-put population. Luna: Okay, so landlords have pricing power. But why aren't new apartment buildings bringing rents down? There was a building boom in 2022 and 2023. Lucas: There was — multifamily starts peaked in 2023. But a lot of those units are now coming online as 'luxury' or 'market-rate' with higher base rents. Plus construction costs — labor, materials, financing — are still elevated. So even new supply isn't cheap. And in many cities, zoning and permitting remain bottlenecks. Luna: So the rent inflation we're feeling is partly real — driven by supply constraints — and partly a measurement artifact. But either way, it's hitting household budgets. Lucas: Exactly. And the Fed, by focusing on a lagged shelter measure, risks keeping policy too loose for too long — or too tight, depending on how you read it. If shelter is actually running 6 to 7 percent, then underlying inflation is stickier than the 3.4 percent core PCE suggests. Luna: Which argues against rate cuts. But if the Fed looks at CPI shelter and sees it decelerating — which it has been, slowly — they might think they have room to ease. It's a tricky signal. Lucas: It is. And one thing that helps cut through the noise is looking at alternative data. The private sector has jumped in — companies like Zillow, Apartment List, and CoreLogic all publish real-time rent indexes. They all show the same thing: market rents are still growing faster than CPI shelter. Luna: But the Fed doesn't officially use those. They're not part of the dual mandate framework. Lucas: Right. Though Fed researchers publish working papers citing them. So they're aware. But the official policy rate is tied to PCE, which is tied to CPI shelter data. That's the constraint. Luna: So what does this mean for someone listening who's about to sign a lease or renew one? Should they expect rent inflation to cool, or should they brace for more? Lucas: Near term — the next six to twelve months — I think we'll see market rent growth moderate, but not collapse. The wave of new supply in Sun Belt markets will help. But in coastal, supply-constrained cities, rents will keep climbing. The wildcard is if the economy slows enough to weaken demand — but right now, the labor market is still fairly tight. Luna: So the CPI shelter number might continue to drift down slowly, but your actual rent check might not feel that way for another year or more. Lucas: Exactly. And that's the core message today: the inflation you experience depends on your housing situation. If you're a long-term homeowner, your shelter cost is basically flat. If you're a renter who moves, it's brutal. Luna: It's a reminder that averages hide a lot of pain. Which is, I think, why shows like this exist — to help people understand the gap between the headline and their wallet. Lucas: That's exactly why we do this. And speaking of that — we deliberately keep this podcast free of ads. No sponsors, no commercials. Just the economics, straight up. Luna: If you find that valuable and want to support the choice to stay ad-free, there's a simple way. It's buy me a coffee dot com slash fexingo. Lucas: No pressure, no perks. Just knowing that listeners who can and want to chip in help keep the lights on. And it lets us keep digging into these data layers. Luna: Back to the rent gap, though — one more thing that struck me: the PCE shelter data for May showed a slight deceleration. But that's the May number. What about the April and March revisions? Lucas: Revisions matter a lot. In April, shelter PCE was revised up by a tenth. Small, but in the right direction. The BLS also revised March CPI shelter up. So the trend is still that official measures are playing catch-up. Luna: So if I were a renter listening, I'd look at the market rent indexes for my city, not the national CPI. That's where the real story is. Lucas: Absolutely. National averages are useful for monetary policy. For your personal budget, you need local data. And the honest truth is, until the BLS changes how it samples or introduces a new-lease index, the CPI will keep understating rent inflation for millions of Americans. Luna: Maybe the next revision to the CPI methodology — whenever that happens — will close the gap. Lucas: Maybe. The BLS has been researching a 'rental equivalence' alternative for years. But methodological change is slow. In the meantime, we're left with a measure that tells you more about the past than the present. And that's worth remembering next time you see a headline that says 'inflation is cooling.' Luna: Cooling for some. Not for everyone. Lucas: That's the takeaway. Thanks for listening.