Headline inflation rose 30 basis points (bps) to 3.4% year over year in December, according to recently released CPI data.
Core inflation, however—which excludes the more volatile elements of food and energy—fell 10 bps to 3.9% year over year, marking the ninth consecutive month of cooling. This figure should come down further as shelter inflation (40% of core CPI) continues to moderate.
U.S. asking rents—what residents pay to sign a new lease—have been moderating for over a year now, but there is a significant lag between changes in these market rents and what is captured by CPI (what residents are currently paying).
- The growth of asking rents for multifamily properties peaked at 10.5% year over year in 1Q 2022, according to data from CoStar, and then moderated to just 0.9% annual growth in the fourth quarter of 2023.
- Annual shelter inflation, however, didn’t peak until March of last year (2023) at 8.2% before cooling to 6.2% in December.
What this means for Fed policy and interest rates:
December’s core CPI reading represents another month of incremental progress for the Federal Reserve in its effort to bring down inflation. Yet, the rise in headline inflation, which remains above the Fed’s 2.0% target, poses continued risk to the apartment industry both directly and indirectly:
- Rising interest rates have already caused a sharp reduction in both apartment sales volume and new apartment construction, which will only lead to higher rental prices and worsening affordability conditions in the long run.
- Tight monetary policy threatens the strength of the broader job market and economy, which has not yet fully digested the rate hikes already enacted.
The Fed will have to account for these risks, along with the fact that core inflation has already subsided to nearly 2.0% when we account for the lag between asking rents and the shelter component of CPI.