What's new:
U.S. consumer prices rose 3.7 percent year over year for the second straight month in September, according to recently released CPI data. Inflation had cooled for twelve consecutive months before ticking up in July and August of this year.
This inflation number was propelled again by the price of energy, which rose 1.5 percent from September and, more notably, the price of gasoline—up 2.1 percent from the month prior.
The good news:
The good news is that core inflation—which excludes the more volatile elements of foods and energy—cooled for the sixth consecutive month to 4.1 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 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 10.8 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 7.2 percent in September.
When we exclude this cost of shelter, core CPI was up just 2.0 percent from the previous September, exactly in line with the Fed’s target.
What this means for Fed policy and interest rates:
September’s 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 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.
- 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 will have 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.
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.