What's new:
Headline inflation fell 10 basis points (bps) to 3.1% year over year in November, according to recently released CPI data. Inflation had cooled for twelve consecutive months before ticking up in July and August of this year.
This moderation in annual inflation continues to be driven, in part, by declining energy prices as well as moderating rent costs. The energy component of CPI fell 2.5% in October and then an additional 2.3% in November—down 5.4% from the prior year—while annual shelter inflation fell 20 bps to 6.5% in November.
The good news:
Core inflation—which excludes the more volatile elements of foods and energy—remained at 4.0% after seven consecutive months of cooling. This figure should 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 now, 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 10.5% year over year in 1Q 2022, according to data from CoStar, and then moderated for six consecutive quarters, reaching just 0.8% annual growth in the third quarter of this year.
- Annual shelter inflation, however, didn’t peak until March of this year at 8.2% before cooling to 6.5% in November.
When we exclude this cost of shelter, core CPI was up just 2.1% from the previous November, almost exactly at the Fed’s target level.
What this means for Fed policy and interest rates:
November’s CPI reading represents another month of incremental progress for the Federal Reserve in its effort to bring down inflation. Yet, so long as headline inflation remains above the Fed’s 2.0% target, interest rates are likely to remain elevated, posing some 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.
- Tight monetary policy threatens the strength of the broader job market and economy, which has not yet fully digested the rate hikes already enacted.
The Fed will have to account for these risks, along with the fact that core inflation has already subsided to nearly 2.0% when we account for the lag between asking rents and the shelter component of CPI.
About Chris Bruen
Chris Bruen is Senior Director of Research, with primary responsibility for aiding in and expanding upon NMHC’s research in housing and economics. Prior to joining the Council, Chris conducted research on the behavioral tendencies exhibited by option traders and served as a contributor to the Shanghai-based business publication, MorningWhistle.com, where he wrote on topics relating to Sino-American economic policy. Chris holds a bachelor’s degree in Finance from The George Washington University and an M.S. in Economics from Johns Hopkins University.
He can be reached at cbruen@nmhc.org.