On Wednesday, February 13, 2024, the U.S. Bureau of Labor Statistics (BLS) released a key set of data regarding inflation and the Federal Reserve’s future path of interest rate policy, the January Consumer Price Index (CPI) release. Month-over-month, CPI rose 0.3% compared to a 0.2% rise expected by economists in December 2023. Year-over-year CPI increased annually by 3.1% versus an expected increase of 2.9% (1).
The Consumer Price Index (CPI) measures the monthly changes in prices paid by American consumers, using a weighted average of various goods and services to represent the typical monthly expenses of the average American.
It’s always important to review which categories contributed to stronger or weaker-than-expected results in any economic data release. It is also important to understand the data source and its components. Newly published data can often represent an outdated picture. Depending on how the data is collected and the lag between collection and publication, some data points can be more backward-looking than others.
January’s unexpected increase was fueled by higher shelter costs than anticipated, but it’s important to understand that shelter is typically a lagging indicator and a few months behind higher-frequency data sets from companies that specialize in connecting rental hunters with apartments or homes. The shelter portion of CPI has two main subcategories for rent: Rent of Primary Residence and Owner’s Equivalent of Rent (OER). Rent of Primary Residence refers to the actual rent paid by tenants for their housing, while Owners’ Equivalent Rent (OER) estimates the rent homeowners would pay if they were renting their own homes, serving as a proxy for housing costs in the CPI. Rent of Primary Residence increased by 4.44% YoY, and OER increased by 6.94% (2), a large gap that may not yet reflect the trend of declining rent growth seen in the high-frequency data. The Apartment List’s February 2024 National Rent Report showed a one percentage point decline (3) in rents over the past year and the sixth consecutive month of rental growth decline; both are promising signs for upcoming CPI prints.
Redfin’s Rental Market Tracker also shows positive news on the rental front; year-over-year rental growth in the United States stayed in a narrow range of -2.1% to +2.4% over 12 months, a lot tighter than a year prior that saw year-over-year rental increases as high as 17.7%. Redfin also reported rental vacancy rates of 6.6% in the fourth quarter of 2023, the highest level since 2021 and hopefully a sign that the increased supply of new rental units will result in a decline in initial asking rents (4).
The elevated shelter reading is a lagging indicator that takes time to factor in new asking rents, and the data from both Apartment List and Redfin add promising signs for a continued decline in CPI in the upcoming months.
Sources:
- Consumer Price Index Summary – 2024 M01 Results (bls.gov)
- https://x.com/RenMacLLC/status/1757398243716002271?s=20
- Apartment List National Rent Report
- U.S. Asking Rents Flatten After Pandemic Rollercoaster Ride (redfin.com)
- United States Home Prices & Home Values | Zillow
- How does the Consumer Price Index account for the cost of housing? | Brookings
- Measuring Price Change in the CPI: Rent and Rental Equivalence : U.S. Bureau of Labor Statistics (bls.gov)
- Apartment List National Rent Report
- January CPI Report: What the Experts Are Saying About Inflation | Kiplinger
