Washington D.C. — The prices of new rental leases have fallen faster than average rent, but those declines are not yet fully reflected in the rental price index. A new CAP column explains why the rental price measure included in the overall price index lags behind price changes for new tenants’ leases by about 12 months and how lower rent for new leases ultimately helps lower inflation overall.
Inflation has substantially cooled from its highs in 2022, and economists expect that housing inflation will continue to fall in 2023, further reducing overall inflation. The single largest item in the Consumer Price Index for All Urban Consumers (CPI-U) is rent and the cost of owning a house, and their measurement depend on how the index for rental leases is constructed. Since it takes time to capture changing market conditions and have them reflected in new rental leases, the rental price index, housing inflation, and overall inflation often lag behind changes in prices for new tenants’ leases by about a year.
Often, the CPI-U is a closely watched measure of inflation in the United States since it captures the prices of all goods and services, big and small, from clothing and gasoline to new cars and housing. This column looks at the various components within the CPI-U, especially measures of housing inflation, that make up the inflation rate and makes the case for why average rent will likely continue to fall, contributing to lowering the overall inflation rate.
“Housing costs, whether it’s paying rent or the costs of owning a house, are the largest expense for a family and make up nearly a third of the total price index,” said Christian E. Weller, senior fellow at CAP and co-author of the column. “Given the weight housing costs have on total inflation, overall inflation could decline for the rest of the year, as the price increases of new leases have significantly slowed.”
Read the column: “It’s All About Housing: Rental Inflation and Its Measurement Play an Outsize Role in the Consumer Price Index” by Christian E. Weller and David Correa
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