Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Your Rent Is Rising Faster Than CPI
Transcript
- Lucas: So the May CPI came out a few weeks ago, headline inflation at 3.3 percent annualized, core a touch higher at 3.4. And if you just read those numbers, you'd think the inflation story is finally calming down. Luna: But your rent check this month probably told a different story. Mine sure did. Lucas: Right. And that's the disconnect I want to unpack today. Because shelter inflation — the part of CPI that tracks housing costs — is still running at more than double the headline rate. In May, shelter was up 0.4 percent month over month, which annualizes to about 5 percent. Owners' equivalent rent, which is the biggest single component of CPI, is at a 5.2 percent annualized pace. So if you're a renter, the official numbers feel like gaslighting. Luna: And it's not just a feeling. The BLS measures shelter with a big lag — they survey rents every six months, so what's in the May CPI is actually reflecting leases signed back in late 2024, early 2025. Lucas: Exactly. That's the mechanical reason. But there's also a structural one: the rental market is tighter than most people realize. I was looking at a real-world example — a 1,200-unit apartment REIT based in Phoenix. They reported last week that they raised rents on renewals by an average of 8 percent year over year. And their occupancy is still at 96 percent. Luna: Eight percent. That's way above what CPI shelter is showing. And Phoenix isn't an outlier — similar stories in Nashville, Charlotte, even parts of the Midwest now. Lucas: Yeah. And this is where the Fed's rate pause matters. The effective fed funds rate is at 3.63 percent as of May, and the interest on reserve balances is 3.65. Mortgage rates are still hovering around 7 percent for a 30-year fixed. That locks out a lot of first-time buyers, so they stay in the rental pool longer. More demand, same supply, landlords have pricing power. Luna: It's a vicious cycle. The Fed wants to cool housing to tame inflation, but by keeping rates high, they're actually fueling rental demand. And rental costs feed right back into CPI. Lucas: Precisely. And the lag means the Fed is flying blind on shelter. The 10-year breakeven inflation rate is down to 2.25 percent, which suggests the bond market thinks inflation is under control. But if shelter stays sticky, headline CPI could reaccelerate later this year when those older leases roll off and get replaced by current market rents. Luna: So what does this mean for someone listening who's about to renew a lease or looking to move? Is there any way to get ahead of it? Lucas: Yeah, there are a few things. First, negotiate. Landlords often start with a high renewal number expecting you to push back. If you've been a good tenant, you have leverage — it costs them money to turn a unit. Second, look at smaller buildings. The big REITs have pricing algorithms and institutional ownership that push rents uniformly upward. A mom and pop landlord might be more flexible. Luna: And if you're in a position to buy, the calculus has shifted. Yes, mortgage rates are high, but if rents keep rising 8 percent a year, the breakeven on buying versus renting gets shorter every month. Lucas: That's a good point. I was running numbers for a friend in Austin — her rent went from $1,800 to $2,000 this year. A $400,000 condo with a 7 percent mortgage would cost her about $2,700 a month all in. But if rent keeps climbing 8 percent annually, in three years she'd be paying $2,300 in rent. That gap narrows fast. Luna: It's also worth checking if your city has rent control or stabilization ordinances. A lot of people don't know what's on the books. In places like California, Oregon, and a growing list of cities, annual increases are capped. Lucas: Right. And on the investing side, this persistent shelter inflation is one reason I still like certain REITs — especially ones focused on workforce housing in supply-constrained markets. They have pricing power that's durable, not cyclical. Luna: Before we get deeper into the investment angle — and I want to — I just want to say, if our money conversations have helped you think about a decision differently, whether it's negotiating your lease or rethinking your budget, 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. Lucas: Yeah, it really does make a difference. And it keeps the show ad-free, which is how we want it. So thank you to anyone who's chipped in. Luna: Now, back to those REITs — the workforce housing ones. What specifically should listeners look for if they want to invest in this shelter inflation trend? Lucas: Good question. Look for REITs with high exposure to Sun Belt markets — Phoenix, Dallas, Atlanta, Nashville — where population growth is driving structural demand. Also check their lease expiration schedule: if a REIT has most of its leases rolling over in the next 12 months, they can reprice to current market rents faster. That's where the earnings growth will come from. Luna: And what about the risk? If the Fed eventually cuts rates, mortgage rates drop, and some of that rental demand shifts back to home buying. Lucas: That's the big risk. If the Fed cuts 100 basis points, mortgage rates could drop to 6 percent, and the math on buying versus renting changes. But the thing is, the Fed is on pause precisely because inflation is still above target. They're not going to cut until they're confident shelter inflation is coming down. So we might be in this regime for a while. Luna: So the same factor that's hurting renters — sticky shelter inflation — is also the thing keeping the Fed from cutting. It's a trap. Lucas: Exactly. And it's why I think shelter inflation is the most important number to watch over the next six months. The bond market is pricing in 2.25 percent inflation over the next decade, but that assumes shelter normalizes. If it doesn't, breakevens could widen again, and the Fed might have to tighten further. Luna: Let's talk about the specific data points you're tracking. What should listeners look for in the next CPI release? Lucas: Two things. First, month-over-month shelter inflation. If it stays above 0.3 percent, that's a problem. Second, look at the 'rent of primary residence' subindex — that's actual market rents, not the imputed owners' equivalent rent. That one tends to lead the overall shelter number by a few months. If it accelerates, you know shelter is going to stay hot. Luna: And on the ground, there's also the story of new supply. A lot of multifamily construction started in 2022 and 2023 is just now coming online. In some markets, that could actually put downward pressure on rents. Lucas: Yeah, that's the hopeful angle. Austin, for instance, has seen a wave of new apartments hit the market, and rent growth there has moderated. But nationally, completions are peaking. The pipeline for 2027 and beyond looks much smaller because higher financing costs have stalled new starts. So the supply relief might be temporary. Luna: That's a great point. So the next 12 to 18 months could be the window where renters see some relief, but after that, if starts don't pick up, we're back to tight supply. Lucas: Right. And that's why I keep coming back to the Fed's dilemma. They need to bring down shelter inflation to declare victory on inflation, but the tools they have — higher rates — actually make the housing shortage worse by choking off new construction and keeping potential buyers in the rental pool. Luna: It feels like there's no easy way out. So for listeners, the takeaway is: understand your local market, negotiate your lease, and don't assume the CPI number reflects your reality. Lucas: Exactly. The national average is just that — an average. Your personal inflation rate depends on where you live and what you spend. And right now, for most renters, shelter is the biggest line item and the one going up fastest. So pay attention to it, because the Fed is.