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Everybody is waiting for rent relief to help bring overall inflation down. It might take longer than conventional wisdom suggests.

Why it matters: 

A surge in market rents in 2021 and 2022 still has a ways to go in fully working its way through the economy, despite moderation in market rents since then, a new paper from a Boston Fed economist finds.

• As a result, rents are on track to exert upward pressure on overall inflation for quite a while to come, the paper argues, a headwind to bringing inflation down to the Fed’s 2% target.

The big picture: 

Rents soared during and immediately after the pandemic as Americans sought bigger homes and were flush with higher paychecks and pent-up savings. But private-sector indicators of market rents rose much faster than the rent numbers calculated for the Consumer Price Index and other inflation indicators at that time.

• That’s because market rent data only encompasses people signing new leases. Many existing tenants saw no immediate change — perhaps because they had long-term leases in place, or landlords were reluctant to raise rent on existing tenants, or local laws constrained rent hikes.
• But over time, those leases turn over, with more renters paying the higher market prices. That process is still underway, even though market rents have risen less in 2023 and 2024, according to the analysis from the Boston Fed’s Christopher D. Cotton.

By the numbers: 

Compared to 2019 levels, there is a 6 percentage point gap between rents on new leases and the shelter inflation shown in the CPI.

• The process of higher market rents filtering through the inflation data is on track to add 0.7 percentage point to the core Consumer Price Index over the next year and 0.3 percentage points to core inflation using the Fed’s preferred gauge, Cotton finds.
• “The fact that market rents remain 6% higher than CPI-shelter relative to pre-pandemic implies that CPI-shelter will grow more quickly than market rents for the foreseeable future,” Cotton tells Axios.

Of note: 

Fed vice chair Philip Jefferson noted last month that “market rents adjust more quickly to economic conditions than what landlords charge their existing tenants.”

• “This lag suggests that the large increase in market rents during the pandemic is still being passed through to existing rents and may keep housing services inflation elevated for a while longer,” Jefferson said.

The intrigue: 

One risk to watch is that even once the pandemic-era rent inflation has worked its way through the data, there could be a new surge in market rents due to under-supply.

• Construction of new multifamily housing has plunged below pre-pandemic levels in recent months as builders grapple with high interest rates.