Latest inflation data doesn't capture falling rents in some metro areas

Prices rose 3.3% year-over-year in March, according to the latest consumer price index from the Bureau of Labor Statistics. When it comes to the Federal Reserve’s ongoing fight against inflation, the cost of shelter — that’s what people pay for rent and what homeowners would pay if they were renting — continues to be a sticking point.

This measure skyrocketed during the pandemic, but has been steadily declining. That is, until the last three months, when shelter costs as measured in the consumer price index have been stuck at a 3% annual increase.

While that may seem discouraging, there are indications that shelter costs will come down in future CPI reports.

Shelter costs make up about a third of the overall CPI, so they have a significant impact on inflation readings.

“Shelter is a really big part of the CPI, because the cost of housing is a really big part of households’ monthly budgets,” said Jenny Schuetz, a housing economist at the non-profit research firm Arnold Ventures.

The good news is that home prices are moderating and rental housing supply is improving.

“So places like Austin and Phoenix and Atlanta have built a lot of apartments, and as more housing supply came online, of those metros, the cost of housing has come down,” Schuetz said.

As some metro areas saw falling costs, the nationwide average for asking rents also came down. According to Realtor.com, asking rents fell more than 1.5% in February.

So where’s all this in the CPI report?

“Part of it has to do with what what we're measuring, and what CPI measures,” said Jake Krimmel, senior economist at Realtor.com

They’re different. The Bureau of Labor Statistics is looking at new rents that month, yes, but also old rents.

“About 60% of rental units are covered by 12-month leases, so rents can't necessarily adjust to what's changing on the market,” Krimmel said.

Not right away, at least.

Also, a big chunk of the shelter calculation is owner equivalent rents — what people think their homes would rent for. That measure has a lag as well, as homeowners’ expectations adjust.

Krimmel said the CPI will eventually catch up, but don’t expect shelter inflation to go too much lower than its current 3% rate.

“If we look back to pre-pandemic averages, it does look like it's kind of hovering right around this three. So I'd say it's relatively normal,” he said.

Meaning the burden to pull inflation lower will likely fall on other elements of the CPI.