High rents are propping up inflation in the US

Now inflating.
Now inflating.
Image: AP Photo/Mel Evans
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Another month, another meager American inflation reading. And if it weren’t for rapidly rising rents, it’d be even lower.

July’s consumer price index advanced 0.2% from a year ago, and 1.8% if you strip out food and energy. Both measures have been hovering around the same level for months.

But if you account for the cost of shelter, inflation has been even slower. That’s because shelter is heavily weighted in the CPI index (32.8% in July). If you take out housing, food, and energy, the rate of inflation has actually been falling for the past few months.

One of the biggest trends in post-recession housing has been the shift toward multifamily housing and renting. The rental vacancy rate is the lowest it’s been in just under three decades. That’s why big firms like Blackstone are rushing to put together portfolios of rental housing so they can package the rent payments into bonds.

Justin Wolfers, a University of Michigan economics professor, pointed out that shelter’s relatively large weighting in the CPI compared to the Federal Reserve’s preferred personal consumption expenditure index means it will overstate the so-called “core” inflation.

Indeed, PCE inflation hasn’t hit the Fed’s 2% target in three years. It’s still unclear whether the Fed will raise interest rates next month (paywall), but if it does, rising inflation likely won’t be a central part of their argument for doing so.