A report released by the Cleveland Federal Reserve on Wednesday said that rent inflation will continue to put pressure on consumers for some time to come. This finding may indicate that the Federal Reserve will face continuing challenges in reducing the overall inflation rate to 2%.
Cleveland Federal Reserve economists said in the report: “Our baseline forecast means that rent inflation in the CPI will continue to be above the pre-COVID-19 level of about 3.5% until mid-2026.”
A key factor in keeping rental inflation rising is the gap between new rents and existing rental rents. Analysts said that it will take some time before the sharp rise in new rental rents becomes apparent in the data, the so-called lag.
The statement that released the report stated that this gap was “significantly larger” than before the COVID-19 pandemic began, when the gap was only slightly higher than 1%. According to the report, “We estimate the rent gap in September 2024 to be slightly less than 5.5%, which means there is still a large amount of potential rent inflation to be transmitted to existing tenants.”
The possibility that rental inflation may persist could further complicate the Federal Reserve's anti-inflation efforts.
Federal Reserve officials generally believe that inflation is falling back to 2%, so they started a cycle of cutting interest rates last month. This cycle is likely to continue for some time as officials work to normalize monetary policy.
Many Federal Reserve officials and economists expect housing inflation to become easier, which will help the anti-inflation process.
Omair Sharif of the research firm Inflation Insights said in an October 10 report that the annualized rent growth rate up to September this year was 4.6%, compared to 6.8% in 2023. “This shows a marked slowdown in rent growth,” he said.
St. Louis Federal Reserve Chairman Mussalem said on October 7, “The decline in rent inflation should reduce the housing portion of the overall price index over time.” This prompted him to say that he expects inflation as measured by the PCE price index to reach the 2% target “in the next few quarters.”
Boston Federal Reserve Chairman Collins said on October 8 that the rise in housing prices “is the hardest factor to subside, and is still higher than the pre-COVID-19 average.”
But she added, “There are good reasons to believe that the continued stickiness of the current housing inflation reflects that current rents are still catching up with new market rents.” She pointed out that the slowdown in new rent price increases indicates that the increase in lease renewals will also slow down eventually.
She also said that the new slowdown in rent increases reflects that the job market is no longer as hot.