Understanding the Complex Relationship Between Inflation and Housing

Apartment List put together an explainer on how housing costs factor into inflation and where housing inflation might be heading. But the topic is even a bit more elusive than the explanation.

Inflation—commonly measured by the Consumer Price Index, or CPI—is a complex topic. The government measures the ongoing costs of a “market basket of consumer goods and services,” according to the Bureau of Labor Statistics. The collection can change over time and prices are checked in many different geographic locations. The single number is an average, so not necessarily the real experience of any one household. 

Also, the impact of inflation depends on your personal circumstances, because things in the market basket change at different rates. Typically, housing, school and childcare, and healthcare all rise significantly faster than per capita disposable income, which is the money left over after paying personal taxes. If you are paying for college or a significant illness, chances are that you feel the effects or rising prices more than someone who isn’t.

As Apartment List notes, the shelter portion of CPI is an estimate based on actual market rents but also a market rent equivalent for people who own their homes. That shelter component is up 5.5% year over year, versus so-called topline 8.6% CPI, which is the official overall number. 

But that’s differentiated from “core” inflation—that’s inflation with food and energy costs taken out. The rates of inflation for those two categories are 10.1% and 34.6%. So, in one sense, Apartment List is correct that shelter is not the main driver of inflation at the moment.

“The reason that the shelter component of CPI shows housing costs rising more modestly than our index [of rent changes] is that the two measures are actually answering different questions,” the company explains. Apartment List’s rent index tracks rent changes for new leases, while the CPI tracks ongoing changes in price. But people will tend to sign a new lease once a year, not once a month. They don’t feel the constant increase, but it hits the pocket in a noticeable way annually.

Also, while shelter is not the fastest growing part of inflation, it is the largest single component of CPI, and it is one that is more difficult to mitigate. When food becomes very expensive, people substitute, like buying ground beef instead of steak or a cheaper brand of coffee. When energy grows rapidly, people can travel less or swap out incandescent bulbs for other technologies that use much less power. For housing, making short-term swaps or changes in utilization isn’t possible. So, while housing technically isn’t the biggest component of inflation, it’s growth, at least for those renting or buying a new place, is more inexorable.

One thing that Apartment List mentioned was that its data shows a likely cooling of rents. “Year-over-year growth in our rent index peaked at 17.8 percent this January and has since fallen to 14.1 percent as of June,” they wrote. “Assuming a seven-to-eight-month lag [that analysis suggests exists], we would expect that year-over-year growth in the rent CPI will begin to decline in the data for September or October.”