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Seemingly inevitable deceleration of the government measures of average rents may be resuming

Published on March 12, 2024

Gerard MacDonell

We have had a few head fakes during the past few months doing back of the envelope calculations of what the detail in the CPI release probably mean for the core PCE deflator and its own underlying detail, which are basically all that matter. So, until I see the formal bean counts, which I am not set up to replicate, I will hold off commenting on how hot the CPI was.

As often, I will start by refreshing my sense of how rents are behaving, because I have a relatively informed and occasionally differentiated take on that issue. The stepdown of OER growth within the CPI from 56 bps in January to 44 bps in February should encourage those who do not accept my premise that lower rent inflation in the government data has long been inevitable (so why bother waiting for it to show up?). This is particularly true given that the monthly gains may have some momentum, including in the second derivative, because of the use of those 6-month rotating panels. In any event, it looks like the PCE housing services deflator will be up 44 basis points as well during February, following 52 bps in January. So, for those who care, things look better on this front, although not quite yet dramatically so. For example, the 3-month rate of change of PCE housing services has not yet made a renewed lurch lower, although that is coming.

As I seasonally adjust their figures, the Zillow Observed Rent Index (ZORI) was up 17 bps during February and at an annualized rate of 1.5% during the past three months. Combining this with my sense of the CoreLogic SFRI, to which I have more limited access, I will stick for now with the view that “true” underlying marginal rent growth is running at about 2 1/4%. With that the case, each month of firmer gains in the government data will further close the gap. This combined with the facts that the marginal rent growth is slow and that these indexes all share a common trend in level terms, I will stick with my somewhat out of consensus view that a deceleration in the government data is inevitable and that people willing to look a few months forward need not wait for it. I concede that the official data are marginally relevant to the Fed. To repeat, for the rest of how the core PCE deflator will track, which is obviously more important, I must wait for the bean counts.

Marginal rents make the future of average rent growth virtually inevitable

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Description automatically generated — *Source: BEA Zillow, FH calculations including seasonal adjustment*
*PCE housing data are actual to January and effectively actual to February. ZORI is actual to February and seasonally adjusted by FH.*

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