Real Estate Likely to Transition to Be a Source of Inflation

Housing prices account for roughly one-third of the U.S. consumer price index (CPI), but have not yet contributed in a big way to recent inflationary pressures, despite double-digit growth rates for apartment rents, as reported by listings company Zillow. The issue is the difference between spot-market rents and the rental measure used in the CPI calculation. The discrepancy also suggests more inflationary pressure ahead from shelter prices.

The rental component of the CPI includes a mix of responses from apartment tenants with long-standing occupancy, as well as those paying the current market rent because they had leased an apartment recently. Taking a three-year trailing average of the growth rates in the Zillow Observed Rent Index, a measure of rental-price change, approximates the trend in the rental component of the monthly CPI. There are differences shown in the chart below, but as a general indicator, this relationship suggests ongoing pressure ahead from housing costs.

Rethinking real estate’s role

Even if growth in spot-market rents were to immediately moderate to the 3.6% average annual pace seen from 2015 to 2018, growth in the rental component of the CPI would still move above the 6% growth level through 2024. Energy prices had been punching above their weight in the CPI calculations, but retreated by 5% in August from the levels seen in July. Rather than thinking of real estate investment as a haven from inflation, investors may worry about the implications of the sector transitioning to a source of the above-average trend in overall price growth.