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  • Writer's pictureJason Tuvia

Normalizing Rent Growth Points to Future Cooling in Core Inflation

Inflation Continues to Show Varied Trends

The headline consumer price index (CPI) showed a slight uptick in July, rising by 3.2 percent year-over-year, compared to June's 3.0 percent reading. The increase was driven by higher costs in food and certain energy categories. This marked the first acceleration since June 2022, hinting at potential fluctuations in the inflation path ahead. However, market expectations of a continued CPI slowdown remain anchored by factors such as a cooling job market and easing price pressures across various goods and services. Core CPI, excluding food and energy, registered at 4.7 percent year-over-year in June, its lowest rate since October 2021. Removing shelter from the equation, the "supercore" CPI grew by 2.5 percent year-over-year. The housing component, known for its lagging indicator nature, is expected to significantly subside, thereby reducing inflationary pressures.

Housing Data: A Look at Pricing Pressures

The shelter index, which tracks housing costs, exhibited a year-over-year increase of 7.7 percent in June. This category played a major role in driving over 90 percent of the CPI increase for the month. However, the shelter index tends to lag behind current market conditions, with residential leases renewing annually. Consequently, the shelter category could be reflecting rent increases already factored into existing leases, potentially inflating the CPI metric. More recent data suggests that apartment rent growth is slowing down notably. National average effective multifamily rent increased by only 4.0 percent over the year ending in June, a significant decrease from the 16.9 percent recorded in the same period in 2022. This downward shift anticipates a reduction in the shelter index, which might help bring core CPI closer to the Federal Reserve's target. While the Fed primarily references core PCE inflation, core CPI tends to move in alignment with it.

Long-Term Prospects for Class A Properties

The deceleration in multifamily rent growth may raise questions about rental demand. However, this trend has been largely influenced by a surge in inventory during the first half of 2023. Supply-side pressures are projected to bring rent growth to a decade-low by the end of the year. Importantly, this cooling highlights the relative affordability of renting an apartment compared to owning a single-family home. In June, the difference between mean monthly Class A rent and the typical payment for a median priced home widened to $663 per month, approaching a record high.

Fed's Potential Pause and Its Impact

With headline inflation remaining below 4.0 percent for two consecutive months and pricing pressures returning to normalcy, consumer confidence and sentiment have seen widespread improvement. This shift is an indicator of improved household formation, which was previously hampered by steep price increases. A potential pause in interest rate hikes by the Fed in September, coupled with slower job growth, reinforces expectations that the overnight lending rate will remain unchanged. This potential stability can positively impact household formation, benefiting multifamily properties that cater to persistent ownership challenges. During the first half of 2023, over 127,000 units were absorbed nationwide, offsetting relinquishments from the previous year.

Benefits for the Retail Sector

A pause in Fed rate hikes in September could lower borrowing costs for consumers, offering relief after the mean interest rate on credit cards hit an all-time high in May. This could enable shoppers to better finance their holiday spending, providing sustained momentum in the retail sector. June saw core retail sales rise by 3.9 percent year-over-year, contributing to a healthy nationwide growth rate of 3.0 percent in asking rents.

A Multifaceted Economic Landscape

As these insights reveal, the economic landscape is multifaceted, influenced by a myriad of factors such as inflation, housing trends, and the Fed's actions. By staying attuned to these developments, individuals and businesses can make informed decisions that align with the evolving economic conditions, positioning themselves for success in the months ahead.

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