Copyright: Phongphan
What’s new:
U.S. consumer prices rose 3.7 percent year over year in August, according to recently release CPI data, marking the second month of rising annual inflation after twelve consecutive months of cooling.
This increase in inflation was largely driven by the price of energy, which surged 5.6 percent from July. The rise in gasoline prices was particularly acute, increasing 10.6 percent month-over-month.
The good news:
The good news is that core inflation – which excludes the more volatile elements of foods and energy – cooled for the fifth consecutive month to 4.4 percent, and we expect that this figure will come down further as shelter inflation (40% of core CPI) continues to moderate.
U.S. asking rents – what residents pay to sign a new lease – have been moderating for over a year new, but there is a significant lag between changes in these market rents and what is captured by CPI (what residents are currently paying).
- The growth of asking rents for multifamily properties peaked at 10.8 percent year over year in 1Q 2022, according to data from CoStar, and then moderated for five consecutive quarters, reaching just 1.2 percent annual growth in the second quarter of this year.
- Shelter inflation, on the other hand, didn’t peak until March of this year at 8.2 percent before cooling to 7.3 percent in August.
When we exclude this cost of shelter, core CPI was up just 2.2 percent from the previous August, almost exactly in line with the Fed’s 2.0 percent target.
What this means for Fed policy and interest rates:
August’s higher-than-expected CPI reading highlights the challenge the Federal Reserve faces in reaching its 2.0 percent target and raises the odds of additional interest rate hikes and rates staying higher for longer. This poses a significant risk to the apartment industry both directly and indirectly:
- Rising interest rates have already caused a sharp reduction in both apartment sales volume and new apartment construction, which will only lead to higher rental prices and worsening affordability conditions in the long run.
- Rising rates threaten the strength of the broader job market and economy, which has not yet fully digested the rate hikes already enacted.
The Fed needs to account for these risks, along with the fact that core inflation has already subsided to nearly 2.0 percent when we account for the lag between asking rents and the shelter component of CPI.
