Rising Rents Could Cause A Big Bump In The Inflation Rate


Photo: grahammclellan s via flickr

Demand for residential rentals have been on the rise as many prospective homebuyers remain reluctant to pull the trigger.Joseph LaVorgna of Deutsche Bank expects this phenomenon to cause a significant bump in inflation.

From his recent note to clients:

For starters, remember that services dominate the core CPI, accounting for almost 80% of the index. Within services, rents—both owners’ equivalent rent and rent of primary residence—are the dominant subcomponent with a weight of nearly 60%.

Rental vacancies have dropped to 8.6%, the lowest level in a decade, which has caused significant upward pressure to price. Here’s a chart from LaVorgna’s note:

rising rents

Photo: Deutsche Bank

More from the note:

In the past when the vacancy rate was at similar levels, shelter inflation was running above 3% compared to roughly 2% at present. As such, there appears to be little reason to believe that the slight deviation in the CPI shelter uptrend is anything more than a short-term wobble. A rise to a 3% annualized increase in shelter costs will lift the growth rate in core inflation by 40 bps. This is a sizeable increase.

LaVorgna further warns that faster economic growth and falling employment would likely cause rents to rise further.

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