In his speech at the Federal Reserve’s annual retreat in Jackson Hole, Wyoming, Federal Reserve Chair Jerome Powell acknowledged the recent slowdown in rent growth across the country. While rent growth is a significant contributing factor to overall inflation, Powell highlighted that the Fed’s gauge for measuring price changes has yet to fully reflect this cooling trend.
The housing sector, highly sensitive to interest rates, experienced immediate effects from monetary policy adjustments, as revealed after the interest rate liftoff. Mortgage rates doubled in 2022, leading to a decline in housing starts, sales, and house-price growth. Currently, the 30-year mortgage rate stands at its highest level since 2001.
According to Powell, market rents quickly reached their peak and have since been steadily declining. The decline can be attributed not only to higher interest rates but also to the softening of real household income growth over the past few years.
July witnessed a rise in the yearly rate of inflation to 3.2%, with more than 90% of the increase resulting from soaring housing costs. Powell emphasized the Fed’s objective to achieve a yearly inflation rate of 2% and expressed willingness to raise interest rates further to reach this target.
Nevertheless, Powell admitted that the Fed’s measurement of housing inflation has not kept pace with private data sources.
Understanding the Impact of Rent Growth on Inflation
While rent growth plays a significant role in determining overall inflation levels, its recent slowdown has yet to be fully captured by the Federal Reserve’s inflation gauge. Federal Reserve Chair Jerome Powell addressed this concern during his speech at the annual retreat in Jackson Hole, Wyoming.
Powell noted that the housing sector, which is particularly sensitive to changes in interest rates, experienced a noticeable impact on monetary policy following the interest rate liftoff. As mortgage rates doubled in 2022, it led to a decline in housing starts, sales, and house-price growth. The current 30-year mortgage rate stands at its highest level since 2001.
In line with higher interest rates, market rents also experienced a significant slowdown, reaching their peak before gradually declining. The decline in rent growth can be attributed not only to the impact of interest rates but also to the softening of real household income growth over the past few years.
The impact of these changes on inflation is evident, with over 90% of the increase in prices in July attributed to rising housing costs. Powell emphasized the Fed’s commitment to achieving a yearly inflation rate of 2% and expressed readiness to further raise interest rates to reach this target.
However, Powell acknowledged that the Fed’s measurement of housing inflation lags behind private data sources, highlighting the need for continued assessment and adjustment.
Rent Growth Slows in July 2022
According to Apartment List, rents experienced a decline of 0.7% in July compared to the same month last year. This marks the first time since the early days of the pandemic that rent growth has decreased. RealPage Market Analytics reported that in July 2022, rent growth was at a high of 12%. However, there has been a significant slowdown in rent growth over the past few months, primarily due to an increase in the supply of available apartments and single-family homes.
Apartment List predicts that this trend of decelerating rent growth will continue in the coming months, with seasonal patterns suggesting further slowdown. The Federal Reserve takes into account rents paid by all tenants, as well as equivalent rents that could be earned from owner-occupied homes when measuring housing inflation. Even the Fed’s indicators have begun to show a slowdown, as stated by Powell.
Powell, Chairman of the Federal Reserve, explained that the decline in market rent growth takes time to affect the overall inflation measure due to the slow turnover of leases. However, the recent slowdown in rent growth for new leases will impact housing inflation in the coming year. The Fed is aware of this slowdown but is waiting to observe it reflected in the data.
Looking ahead, Powell mentioned that if market rent growth settles near pre-pandemic levels, housing-services inflation should also decline accordingly. The Federal Reserve will closely monitor the market rent data for any signals regarding upside or downside risks to housing-services inflation.
