Rising rents account for a significant portion of recent inflation. Estimates of how rent inflation typically responds to two leading indicators—current asking rents and current house prices—can help forecast the path of overall inflation for the next two years.
Rent and other housing costs make up a significant portion of the basket of goods used to measure overall inflation. As rent inflation has already risen considerably since the onset of the pandemic, my colleagues and I explored the question, Will rising rents continue to push up future inflation?
We looked at two leading indicators to help answer this question: current asking rents and current house prices. First as asking prices for new rental units on the market rise, they push up average future rental rates. Second, as current house prices rise, owners or landlords expect potential future house rental values to be higher.
Both have risen dramatically since the beginning of the COVID-19 pandemic. Zillow’s rent index is up about 16% and its housing price index is up over 28%. They suggest some risk that rent inflation would rise faster in the coming months.
Using data for 15 metropolitan areas from 2014 to 2021, our model predicts that an increase in current asking rents could push up rent inflation about 3.4 percentage points above its usual rate both this year and next year.
So bottom line, looking at inflation as measured by the [overall] PCE index, our results imply an additional half of a percentage point increase for both 2022 and 2023, above what we would otherwise expect. This link between rising rents and future inflation is important to consider in light of the Fed’s 2% average inflation target.
(Courtesy San Francisco Federal Reserve Bank)
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