One very sticky inflation trend (and maybe another) on the rise

·Editor focused on markets and the economy

Thu, Oct 14, 2021, 3:04 AM4 min read

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Thursday, October 14, 2021

Rents are surging, and your ticket out of town could be next

The latest on the inflation front shows that consumer prices are still on the rise. As usual these days, there’s good, bad and worse news.

First, the (sort-of) good news: September’s consumer price index (CPI) was relatively stable, with the headline rate only marginally higher than expectations at 5.4% year-over-year. Core prices, which strip out the more volatile components like food and energy, also held steady at an annualized 4.0%, and some elements like clothing, airline fares and used cars tumbled from historically high levels.

The bad news, of course, is that inflation is still running well above trend (and that’s even before we start factoring in what is shaping up to be a cold winter with very hot energy prices). Inflation expectations are spiraling higher, and the Federal Reserve’s favored buzzword “transitory” is becoming a bit of a meme among economy watchers.

And now, for the worse news: Not only is there no immediate relief in sight, but some of those component declines may not last long. Meanwhile, there’s evidence that relentlessly rising prices are starting to infect other sectors of the economy — namely, where we live and how we travel.

A hint of what might lie in store came on Wednesday from Delta Air Lines (DAL) CEO Ed Bastian, who spoke to Yahoo Finance’s Adam Shapiro for the company’s third-quarter earnings results.

Pointing to skyrocketing energy costs, Bastian suggested that Delta could pass some of those costs down to travelers (who, bear in mind, are already ponying up more cash for virtually everything).

“Consumers are interested in traveling and consumers have a meaningful amount of wealth,” he pointed out. “I think they can cover the higher costs.”

Yikes.

In fact, some economists pointed out that the CPI would have been higher, but for a couple of the more volatile components that fell — and aren’t expected to stay in retreat. And more than a few eyebrows were raised by a spike in rent prices, a development that’s not entirely unexpected given the convergence of two powerful housing trends.

One, last year’s lockdowns, and the resulting exodus from big cities, forced desperate landlords to offer boatloads of concessions to get new tenants and keep existing ones.

Secondly, the end of the controversial federal eviction moratorium effectively freed cash-strapped landlords to hike prices on newly vacant apartments (if you haven’t read Yahoo Finance’s Dani Romero’s spectacular coverage on this hot topic, you absolutely should).

“Primary rents and owners’ equivalent rent account for a third of the CPI basket with movements in these components tending to lag 12-18 months below house price changes,” ING Economics wrote in a research note, adding that housing inflation is “now the story to watch [this] year and could add nearly a full percentage point to annual inflation on their own.”

Taken together, it suggests that both headline and core inflation will remain elevated well into 2022, the bank added. “This hardly fits the ‘transitory’ narrative put out by many at the Fed” (there goes that “t” word again).

Over at Bank of America, economists warned that “given strength in the high frequency rent data, we believed it was only a matter of time before the CPI rent components broke out higher,” according to a research note.

“While one month does not make a trend, this is an early signal of stronger persistent inflation pressures materializing, ultimately supporting continued above-target inflation over the medium term,” the bank added.

No kidding. Renters in big cities like New York have already been hip to that particular game, with data from StreetEasy suggesting the pandemic-era trend of favorable rent deals is all but over. In San Francisco, where an exodus of technology workers to other cities helped push down sky-high rents, prices are creeping back toward pre-COVID levels.

An analysis by Bloomberg in September found that Big Apple “landlords are jacking up rents — often by 50, 60 or 70% — on tenants who locked in deals last year when prices were in freefall,” according to the story.

“Some renters are being forced to move at a time when the market is roaring back to nearly pre-pandemic levels. And concessions are slipping away,” it added.

All of which suggests that renters — and maybe holiday travelers — may have to gird their wallets for more unpleasant price shocks.

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek