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According to the latest release of the Bureau of Labor Statistics’ Consumer Price Index, the average price of goods and services are up 4.9% from one year ago through April 2023. However, while the headline data describe economy-wide inflation for the average consumer, personal inflation rates can differ widely depending on whether someone rents or owns their home.
To estimate these differences, Chandan Economics recalibrates the so-called "basket of goods" for each group, removing renting-related costs for homeowners and owning-related costs for renters. Further, the methodology assumes a 0% primary residence cost inflation rate for fixed-rate homeowners, as the amount they pay on their mortgages does not change from one month to another.
(For a full breakdown of the methodology, see here)
Taking all the above together, Chandan Economics estimates that the adjusted CPI inflation rate for renters was also 4.9% in April 2023, coming in directly in line with Headline CPI and reaching its lowest annual growth rate since April 2021. While the adjusted Renter CPI has come down by a significant 4.3 percentage points in the past ten months, April’s improvement was tepid. Adjusted Renter CPI inflation came down by just 15 basis points in April — a departure from the substantial 97 bps improvement seen the month prior.
Meanwhile, adjusted CPI data suggests that fixed-rate homeowners (or those that own their homes free and clear) have already returned to a normalized inflation environment. Chandan Economics estimates that the adjusted CPI inflation rate for homeowners was just 2.4% in April, edging down six (6) bps from the prior month.
Historically, the inflation differential between these two groups has averaged about one (1) percentage point.[1] Currently, this spread sits at 2.6 percentage points, just a few basis points shy of its all-time high. However, in a possible turning of the tides, the adjusted inflation spread between Renters and Owners narrowed in April — albeit by nine (9) basis points.
As has been well documented, CPI for rent lags prevailing market conditions. CPI tracks the average prices paid by all renters at a point in time, while private data providers track prevailing market conditions. According to Yardi Matrix, national multifamily rent growth totaled 3.1% in April 2023 — far below the CPI measure for rent of primary residences, which stood at 8.8% over the same period. As a result, we expect that Renter inflation will continue to see more robust progress in the coming months as slowing apartment rent growth will filter into the CPI’s measure of rents. Further, if this forecast holds, it will also mean that the inflation spread between renters and homeowners has already reached its widest point and will narrow from here.
[1] Only considers data since 2000.