Cleveland Fed warns sticky rent gains may pressure overall inflation

By Michael S. Derby

NEW YORK (Reuters) -Rent inflation will continue to put pressure on consumers for some time to come, the Federal Reserve Bank of Cleveland said in a report on Wednesday, in a finding that may point to ongoing challenges for the Fed to get overall inflation back to 2%.

“Our baseline forecast implies that [Consumer Price Index]rent inflation will remain above its pre-pandemic norm of about 3.5% until mid-2026,” the Cleveland Fed economists said in their report.

One of the key forces keeping rent inflation kicking is the gap that has been seen between new rents and those for existing leases. The analysts say it will take time for what have been outsized gains in new rentals to pass through to existing rents.

The statement announcing the report notes this gap is “notably wider” than where it was before the pandemic started, when it stood at just above 1%.

“Our estimated rent gap in September 2024 is just under 5.5%, suggesting that there remains a substantial amount of potential rent inflation to be passed through to continuing tenants,” it said.

The possibility rent inflation will remain sticky could complicate the effort to get inflation down after its pandemic surge.

Fed officials are broadly confident that inflation is retreating back to 2% and because of that they embarked last month on the start of a rate cut campaign that could run for some time, as officials work to normalize monetary policy.

Central bankers and economists expect easier times in housing to help that process along.

In a note on Oct. 10, Omair Sharif of research firm Inflation Insights said so far this year annualized rent growth through September stood at 4.6% versus 6.8% in 2023. “That is a solid pace of deceleration in rent growth,” he said.

“Falling rent inflation should bring down the housing component of the overall price indexes over time,” St. Louis Fed leader Alberto Musalem said on Oct. 7. That led him to say he sees inflation hitting the 2% target as measured by the personal consumption expenditures index “over the next few quarters.”

Speaking on Oct. 8, Boston Fed chief Susan Collins said the gain in shelter prices “is the stickiest component and remains above its pre-pandemic average.”

But she added “there are good reasons to think that this stickiness in current shelter inflation reflects existing rents still catching up to new market rents,” noting slower new rent price increases point to an eventual slowing in increases for rental lease renewals.

She also said slower new rent increases reflects a less frenzied job market.

(Reporting by Michael S. Derby; Editing by Sonali Paul)