How the Cost of Rent Is Keeping Inflation in Check

Rents are rising at the slowest pace in more than a year, a welcome development for consumers but another potential complication for Federal Reserve officials waiting for a pickup in inflation. A measure of what Americans are paying for rent was up 3.7% in October and again in November from a year earlier. Rent inflation dipped to that level in September 2016 but was last consistently that low in the opening months of 2016, according to Labor Department data. Major cities including New York, Houston and San Francisco have seen the slowdown in rental cost pressures after years of rapid gains. Rent inflation is still outpacing overall inflation, but the slowdown could ease what had already been limited price pressures from across the economy. That’s one more factor for Fed officials to consider as they weigh their next steps on interest rates. Inflation has continually undershot the central bank’s 2% target year. Consumer price pressures remained muted in November, with prices excluding the volatile categories of food and energy rising 1.7% from a year earlier. The Fed’s preferred inflation gauge, the Commerce Department’s price index for personal-consumption expenditures, rose 1.6% in October from a year earlier, down from September’s annual rate of 1.7%. Rent, which isn’t as big of a component in the personal consumption index as it is in the consumer price index, posted a 3.59% gain in October from a year earlier, the slowest pace in about a year. The Labor Department’s measure of housing costs is comprised of what renters are paying and what homeowners would pay if they were renting their homes. Shelter accounts for about a third of the consumer price index, which means a deceleration in rental price growth can have a significant impact on overall prices. Though price pressures vary across cities and rent itself remains at high levels, rent inflation in metropolitan areas flooded by new apartments is sliding, an indication that over-saturation in apartment housing supply is placing downward pressure on rents. “People feel maxed out, and they’re pushing back, and they’re getting great deals—two, three months [of rent] free,” said Alexander Goldfarb, managing director at Sandler O’Neill + Partners, L.P., noting the downward pressure on rent in luxury markets has been trickling down into less-expensive ones. Several forces converge to put downward pressure on rent: When new buildings rise up and compete to attract renters in a neighborhood, developers often offer generous concessions to help lure them, such as one or two months of free rent. That forces owners of existing buildings to lower rents. Otherwise, they risk losing existing tenants. Some economists predict rental inflation will continue to cool in 2018. Laura Rosner, senior economist at MacroPolicy Perspectives LLC, notes that increases in homeownership and rental vacancy rates mean there will be less demand and less upward price pressure on rents next year. This means inflation for goods and services will need to break out of a post-2012 slump to make progress toward the Fed’s 2% objective, Ms. Rosner said. “You would need them to break radically from the trends we’ve seen since 2012,” Ms. Rosner said. “It’s nearly impossible to get to the Fed’s target if medical care inflation stays low and if shelter inflation is moderating.” RELATED U.S. Consumer Prices Rose 0.4% in November (Dec. 13) As the Fed Deliberates, Amazon Is Making Its Job More Difficult (Dec. 11) Why Ice Cream Is More Important Than Bacon When Tracking Inflation (April 17)

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