Real-time Rental Data a Good Sign for Inflation

Shelter costs significantly influence the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE), the two main government inflation reports that impact the Federal Reserve and financial markets. Shelter makes up a large portion of these indices (nearly 46% of Core CPI and 18% of Core PCE, for example) and therefore plays a crucial role in determining whether inflation progresses towards the Fed’s 2% target.

Currently, shelter costs in the CPI and PCE reports are higher and lag behind real-time rental data that has been reported by Realtor.com, Apartment List, Zillow, and CoreLogic. Let’s take a closer look at what this means.

There are two types of rent: New Rent, where the property is new and vacant, and renewal rent. Most recently, Realtor.com reported that new rents fell 0.5% in December and are now down 1.1% year over year, while Apartment List showed that new rents fell 0.6% year over year. Meanwhile, Zillow’s rental report revealed that renewal rents were up 3.4% year over year.

Blending Zillow’s +3.4% renewal rent with Realtor.com’s -1.1% new rent gives us a blended rent of +1.25% YoY. We do this by applying slightly greater weighting to renewals, so we can account for the higher percentage of renewals versus new rents. Doing the same exercise with Apartment List gives us a blended rent of +1.5% YoY.

Both figures align with CoreLogic’s blended rate of 1.5% that was reported for November. They are also at great odds with data in the CPI and PCE inflation reports. CPI for December showed shelter costs rising a much higher 4.6%, while PCE for November showed shelter costs were up 4.8%.

As the image below shows, if we were to use the softer real-time rental data in the CPI and PCE reports, inflation readings would be significantly lower. Core PCE for November would be 2.2% versus 2.82% without the shelter lag, much closer to the Fed’s 2% target. Core CPI for December would be 1.8% versus 3.25%, coming in below the Fed’s target!

So, what’s the bottom line?

As CPI and PCE reporting begin to better reflect this softer real-time rental data, inflation should decrease. And while many factors influence the markets, lower inflation typically helps both Mortgage Bonds and interest rates improve.

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By The MBS HighwayTeam