Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Rent Is Stuck While Everything Else Drops
Transcript
- Lucas: So CPI dropped again in June — down to 332.6 from 333.98. That's the third straight monthly decline. Core CPI was basically flat. Most of the basket is finally cooling. Luna: And yet my rent went up again this month. Not by a ton, but it went up. I feel like I'm living in a different economy than the one the CPI describes. Lucas: You're not alone. That gap is the single most frustrating thing about inflation data right now. Shelter — which covers rent and what the BLS calls 'owners' equivalent rent' — makes up over 33 percent of the CPI basket. Luna: A third of the whole index. So if shelter is still rising, even if everything else is flat or falling, the headline CPI won't feel right for a lot of people. Lucas: Exactly. And in June, shelter costs rose again. Owners' equivalent rent — that's the imputed rent for homeowners — was up 0.3 percent month over month. Rent of primary residence was up 0.2 percent. Luna: So the single biggest component of CPI is still going up, while the overall index is falling. That's the lag problem, right? Lucas: That's the lag. Shelter inflation tracks market-rate rents with a 12- to 18-month delay. The BLS surveys tenants every six months, so a big rent jump in early 2025 is still feeding into the CPI now, even though market-rate rents on new leases have actually been falling in many cities. Luna: Okay, so the CPI is basically looking in the rearview mirror on housing. What's happening with new leases right now? Are they actually dropping? Lucas: They are. Apartment List’s rent index shows national median rent down about one percent year over year as of June. In Sun Belt cities like Austin, rents have fallen by as much as five percent over the past twelve months. That's a direct result of the apartment-building boom that started in 2022. Luna: Right — all those cranes in Nashville and Phoenix and Raleigh. Developers broke ground on a huge number of units when rates were low, and those are now coming online. Lucas: More than a million new apartment units are expected to be completed in 2026 alone — the most in over 50 years. In markets like Austin, supply has surged so fast that landlords are offering concessions — one month free, waived fees — just to keep occupancy up. Luna: But that's new leases. For someone like me who's been in the same apartment for three years, I'm on a renewal. And renewals are sticky. Landlords don't lower the renewal rate as fast as they drop the new-lease rate. Lucas: That's the crux. Research from the Dallas Fed shows that new-lease rent growth turned negative in early 2025, but renewal rent growth only started to slow in late 2025 — and it's still positive. There's a gap of about four to six percentage points between what a new tenant pays and what an existing tenant pays. Luna: So the CPI catches the renewal increases, not the new-lease decreases. And since renewals lag by a year or more, the headline will keep showing shelter inflation even as the actual market softens. Lucas: And that matters for the Fed. The 10-year breakeven inflation rate ticked up to 2.24 percent this week. That's still close to target, but if shelter stays elevated in the CPI, the Fed might hesitate to cut rates even if the rest of the economy is slowing. Luna: And we saw wholesale prices actually fell 0.3 percent in June — that's a big drop, mostly gasoline. So the producer side is disinflationary. But if the consumer side still feels expensive because of rent, the psychology is different. Lucas: Yeah, the psychology is huge. People don't say 'my personal inflation rate is 1.5 percent if you exclude shelter.' They feel the rent increase and the grocery bill, even if the grocery bill is actually flat now. And that shapes spending behavior, wage negotiations, everything. Luna: So when does the lag finally catch up? When will the CPI shelter component start to reflect what's actually happening in the leasing market? Lucas: Most economists expect it to happen by late 2026 or early 2027. The BLS data will eventually absorb the softer new-lease numbers. But it's going to be a slow bleed, not a cliff. Owners' equivalent rent in particular is very smooth — it only changes a few tenths a month. Luna: And if the Fed does cut rates later this year? Could that reheat the housing market and stop the softening? Lucas: It could. Lower rates mean lower mortgage costs, which could pull some potential homebuyers back into the market. But we're still dealing with a massive supply overhang in multifamily. It would take a lot of demand to absorb a million new units. I think the softening has more room to run. Luna: So for the listener who's frustrated that their rent is up while the news says inflation is down — the message is: you're not wrong, and the data will catch up, but it's going to take months. Lucas: Exactly. And I think, you know, this is the kind of nuance that makes understanding the economy actually useful. It's not just 'inflation is 2 percent' or 'inflation is 3 percent.' It's 'here's why your experience differs from the number.' Luna: And if walking through the economy with us has made something click — or even just made your morning commute a bit more interesting — a handful of listeners already chip in monthly to keep this show ad-free. It's at buy me a coffee dot com slash fexingo. Just a small group, but it's what keeps us independent. Lucas: Yeah, honestly, we don't run ads, we don't have sponsors. That's not a gimmick — it's how we want to do it. So if you find value in these deep dives, that link is the only way to support. And we appreciate it, genuinely. Luna: Alright, back to the lag. One more thing I want to touch on — how does the owners' equivalent rent calculation actually work? Because I think a lot of listeners, myself included, find it kind of abstract. Lucas: It is abstract. The BLS asks homeowners: 'If you were to rent your home, how much do you think it would rent for?' Then they track that hypothetical rent over time. It's meant to capture the shelter cost for the roughly two-thirds of households that own their home. Luna: So it's a survey of what people think they could rent their house for. That's incredibly subjective. Lucas: It is, and it tends to be sticky. Owners often overestimate their home's rental value, and they don't update their estimate frequently. So it dampens volatility. But it also means OER lags even more than actual rents. Some economists argue it's the biggest source of the CPI's lag. Luna: So we've got two lags layered on top of each other — the actual rent smoothing in the BLS survey, and the OER subjectivity. No wonder the CPI feels out of sync. Lucas: Right. And that's why the Fed looks at other measures too — like the PCE price index, which weights shelter differently. Core PCE was up in May to 130.1, and its shelter component is smaller and more responsive to market conditions. But even that has a lag. Luna: So there's no perfect measure. But understanding the lag at least helps you interpret the data. When you see shelter rising in CPI and think 'that doesn't match what I see on Zillow' — now you know why. Lucas: Exactly. And the big picture is that the inflation story is fundamentally a housing story right now. Strip out shelter, and many categories are actually deflating. Goods prices have been falling for months. Used car prices are down. Airfares are down. But shelter is the anchor. Luna: And for most people, housing is their biggest expense. So that anchor weighs heavily. I think the takeaway for today is: don't gaslight yourself when your rent goes up even though 'inflation is falling.' The data is real, it's just delayed. Lucas: Well said. And if the apartment supply wave continues, relief is coming. It's just not here yet. That's the honest story.