- Consumer inflation was hotter than expected in August.
- Shelter, which includes rents, are about a third of CPI and rose at the fastest rate in 40 years.
- This could help keep inflation elevated, the Fed raising rates and consumers squeezed this year.
Rent is the new gas. Surging rent prices – instead of gas – are hitting consumers hard.
Consumer inflation rose at an 8.3% pace in the 12 months to August, and increased 6.3% excluding the volatile food and energy sectors, the Bureau of Labor Statistics said on Tuesday. Both topped economists’ mean forecasts for 8% and 6%, respectively, and dashed hopes inflation had peaked.
Major stock indexes fell on renewed fears the Federal Reserve will have to continue aggressively raising rates to cool inflation. Most economists now expect the Fed to raise its short-term benchmark fed funds rate next week by 0.75% for the third consecutive time.
The surge in inflation came despite a roughly 30% drop in oil and nationwide average gas prices to below $4 per gallon from the June peak that pushed gas above $5 per gallon.
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Spikes in shelter (rents and housing), food and medical care increased inflation. Particularly alarming to economists was the surge in rents, which have about a one-third weighting in the consumer price index (CPI) and tend to take longer to ease. Rents typically change only once a year when leases are signed.
Rents rose 0.7% in August from July and marking the fastest monthly pace since January 1991. Annual rent inflation rose 6.7%, also the highest rate in almost 40 years. Worse, they may still be rising.
“Rent prices look to accelerate in the near term as rental demand remains exceptionally high from ongoing job additions and higher mortgage rates forcing people out of the home buying market,” said NAR Chief Economist Lawrence Yun.
Why are rising rents so harmful?
Not only do fast-rising rents keep overall inflation elevated, giving the Federal Reserve reason to continue raising rates but rents also affect a large swath of people and their budgets.
In August, Bank of America Institute said rent increases were seen across all income groups, but middle-income and younger Americans saw the largest increases.
“With roughly 34% of US households being renters, a sizable increase in rental prices have squeezed consumer wallets,” the institute said.
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Who’s facing the largest rent increases?
For consumers with annual household income of $51,000 to $100,000, median rent payment soared by 8.3% year over year in July, while the lowest income group of $50,000 and less saw a 7.4% increase, Bank of America data showed last month. Those making more than $251,000 annually saw the smallest year-over-year increase (5.9%).
Generationally, Gen Z (or those born after 1996) suffered the largest 16% jump in median rent payment in July from last year, while baby boomers (born between 1946 and 1964) only saw a 3% increase, the data showed.
Why are rents rising, and when will they stop?
Rents aren’t likely to stop rising anytime soon.
Goldman Sachs predicted last month rents would increase by 0.6% to 0.7% from month to month for the next several months and peak around 7% year-over-year later this year.
Reasons for rising rents include high demand as homebuyers are priced out amid rising interest rates and home prices; low inventory; landlords making up for lost rent during pandemic-related rent moratoriums; and higher maintenance costs as inflation jumps, analysts have said.
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How does this affect consumer spending?
Consumer spending has been moderating since the beginning of the year, partly because of the squeeze from rent increases, “but July was not as bad as many had feared,” said Anna Zhou, economist at the Institute.
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Lower gas prices in July freed money to be spent elsewhere, while healthy savings built up during the pandemic provided consumers a cushion. People used some extra money to purchase goods at retail events, including Amazon’s Prime Day, and leisure services like airlines, lodging, entertainment and restaurants, data showed.
Even so, significant rent increases still have time to hit household finances, particularly for middle- and lower-income renters.
“It is likely that rent payments will remain high, creating sustained downward pressure for the consumer,” Zhou said.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her from ella at email@example.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.