Defeat on the inflation front: The Fed’s victory lap about licking fare inflation was premature.
By wolf richter For wolf street,
Zillow Observed Rent Index (ZORI), which is based on asking rents, which means the advertised rents landlords can expect to receive when a tenant signs a lease, month-over-month in April rose 0.6%, the sharpest increase since August, having already jumped 0.5% in March and 0.3% in February to a new record high of $2,018. Annualized, the increase in April translates into a jump of +7.4%.
This is really bad news on the inflation front. But this is not surprising. it confirms What the largest landlords in America told us in their earnings call that they received a 6% to 8% rent increase in April on both lease renewals and new lease signings; and confirms that Rent factors into the CPI for April, which tells us that real rents paid by all tenants increased 0.5% in March to April and more than 8% year-on-year.
You can see how ZORI (red, right axis, $) overestimates real rents during the pandemic as represented by the largest rent factor in the CPI (OER, green, index value, left axis), and it will be in 2022. How it outpaces actual rents in the U.S., and how it dipped in late 2022 and early 2023, and has risen again in the past three months:
Rent accounts for one-third of the consumer price index, divided into two rent factors. The CPI for owners equivalent to rent (OER, the larger of the two, accounting for 25.4% of total CPI) rose 0.5% in April and 8.1% year-on-year.
All these measures – demanding rent as per ZORI; Earnings calls from the nation’s largest landlords; And real rents for all tenants, as tracked by the CPI rent factors – are now showing that rent inflation was not easing at all in April, but instead accelerated again.
ZORI was cited as evidence that rent inflation was slowing and would soon disappear based on ZORI when it had actually fallen.
For the Fed, for Powell during the press conference, and for many others, last year’s drop in rent demand was the gospel they’ve been waiting for, real rent inflation as experienced by current tenants , will soon decrease as demand rents become real rents and will drive down those real rents, but it hasn’t done that yet because, you know, CPI is lagging rent factors, etc.
But this did not happen.
Year-over-year percentage-change mind-twisting.
May have misled even the good people about rent inflation, year-to-year changes. As you can see in the chart above, ZORI grew real rents in 2020 and early 2021, and then from that low base, showed massive year-over-year percentage gains in 2022, leading it to Overshot in 2022.
But that massive percentage gain never made it into actual fares because it undershooted, it averaged undershoots on top of regular fare inflation of just 8%. And now the rent sought per ZORI is back on a month-to-month basis with CPI measures.
This is the type of year-over-year percentage change chart that caused a lot of brains to short-circuit about rent inflation, showing an undershoot in 2020 and early 2021, and an undershoot from that low base in late 2021. Massive overshoot and almost all of 2022. The chart also shows the factors for CPI rent as a percentage change from year to year.
Fed’s victory lap.
The Fed splits the core inflation index (without volatile food and energy products) into three groups: core goods, housing inflation, and core services without housing.
Inflation in core goods has come down significantly from the high levels of the pandemic. Months ago he said that measures of housing inflation (such as the CPI rent factor) would also come down because it was already baked in, based on the decline in rents, and because the CPI rent factor is lagging. So the rent-portion of inflation, he said, had already been bridged. And the only part left where inflation was super-sticky was core services inflation without housing.
So now it turns out, inflation is sticking badly in two out of three quarters, and licking rent inflation on the Fed’s victory lap seems premature.
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