Rising US rents will keep pressure on inflation at 40-year high

Goldman Sachs has analyzed the shelter component of inflation and expects further rental growth, as new leases replace old and fresh demand enters the market.

“While this catch-up effect between new and continuing leases should diminish, economic fundamentals – including rapid recent house price appreciation, strong wage growth, and a low unemployment rate – suggest that the underlying shelter inflation trend should firm through 2023,” Goldman Sachs chief economist Jan Hatzius said.

However, there is a sense from Goldman Sachs analysts that rental costs will not get too far out of control. “A simple model suggests that the peak boost to the official CPI measure of shelter inflation should be fairly modest and occur shortly after a positive shock to new lease prices.”

They expect year-on-year CPI shelter inflation will peak a bit over 5 per cent and reach 4.8 per cent at the end of 2022, 4.5 per cent in 2023, and 4.2 per cent in 2024.

But even such a steady increase in rent will keep inflation much higher than levels comfortable to both the Federal Reserve and President Joe Biden.

Mr Biden said his administration was “using every tool at our disposal” to try to curb inflation. “While today is a reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table, there are also signs that we will make it through this challenge,” he said.

For Mr Cutrera, the next few months are an opportunity for landlords to make some money.

He recently rented a three-bedroom apartment in Arlington, just across the Potomac River from Washington, for $US4750 ($6600), a 5.5 per cent increase from the $US4500 rent of a year ago.

“During COVID, there were such big vacancy rates. But now you have people steaming back into the market. I have a friend who manages 175 units. All of them have been leased out, 100 per cent occupancy.”

“But you don’t know what happens in a year’s time. There could be a whipsaw movement next year because Arlington has huge apartment projects going up one after the other, and that might mean rent will come back down.”