Rental-price increases are decreasing, which could signal that the consumer price index (CPI) might have overstated inflation and is about to see serious improvement.
Key Details
- In a recent interview with CNBC’s Squawk Box, Starwood Capital CEO Barry Sternlicht argued that falling rents are going to result in a hard drop in inflation.
- “Shelter” accounts for one-third of the CPI, and a precipitious change in rent prices is bound to reflect highly in the coming months.
- State-level median rents have decreased by 16% year-over-year while rent growth has declined to single-digit percentage increases for the past six months, Fortune reports.
- March’s yearly inflation rate was reported to be 4.98%, down from a peak of 9.1% in June 2022.
Why It’s Important
Inflation continues to be one of the defining issues plaguing the economy. The Federal Reserve took strident and unpopular action to combat last year’s historical inflation rates by rapidly instituting 10 consecutive interest rate hikes in just 14 months. This has been met with controversy, with business leaders like Cathie Wood and Elon Musk warning that this could spark a deflation crisis. At the same time, liberal politicians like Senator Elizabeth Warren (D-MA) argue that these actions push the blame in the wrong direction.
A rapid decline in inflation could be a positive sign that the Fed’s actions are not only working but that a soft landing of reducing inflation to 2% could occur without sparking a severe recession.
“It’s possible [that shelter CPI has finally peaked]. If it has, that means that one of the main drivers of inflation over the past year will begin to lose steam. And that would lead to even bigger decreases in inflation in the coming months … Inflation is moving in the right direction. And shelter CPI is moving lower. That’s the action I expected to see with the rapid rise in interest rates over the past few months. And it’s finally starting to play out,” says Stansberry Research analyst Matt McCall.
Notable Quote
“Shelter makes up a huge portion of the overall inflation data. With overall 0.4% month-over-month growth and an 8.1% year-over-year climb, this figure made up about 60% of the April CPI (excluding food and energy). But for the first time in more than 25 consecutive readings, shelter data ticked lower. As you can see below, the year-over-year shelter CPI fell slightly from 8.2% in March to 8.1% in April,” McCall continues.