September 11, 2020
Rental inflation continues to slow in high-priced areas.
The overall Consumer Price Index (CPI) rose 0.4 percent in August, bringing its increase over the last year to 1.3 percent. The core index also rose by 0.4 percent, bringing its increase over the last year to 1.7 percent.
With both indexes, the increases were driven by sharp reversals from price declines during the shutdown period. Gas prices rose 2.0 percent in August, after rises of 12.3 percent and 5.6 percent in June and July, respectively. They had fallen by 10.5 percent in March and 20.6 percent in April. They are still down 16.8 percent over the last year.
Apparel prices, which had fallen 8.8 percent from February to May, rose 0.6 percent in August after rising 1.7 percent and 1.1 percent in June and July, respectively. Apparel prices are down 5.9 percent over the last year. Airfares rose 1.2 percent in August, after rising 2.6 percent in June and 5.4 July. They are still down by 23.2 percent over the last year.
Auto insurance prices rose 0.5 percent following increases of 5.1 percent and 9.3 percent in the prior two months. This reflects the fact that the one-time rebates, associated with reduced driving in the shutdown, have ended and prices are now returning to their normal path. The index is still down by 1.5 percent over the last year.
The index for food at home fell by 0.1 percent after a 1.1 percent drop in July. Grocery store food prices followed the opposite pattern of most other items, rising sharply during the shutdown as people bought food at stores instead of going to restaurants. Food at home prices are still up 4.6 percent over the last year, although it is virtually certain that we will see further price declines in the coming months. The final demand index for food in the Producer Price Index fell by 0.4 percent in August after dropping 5.2 percent in June and 0.5 percent in July.
Restaurant prices are again outpacing food prices, rising 0.3 percent in August after increases of 0.5 percent in the prior two months. They are now up 3.5 percent over the last year. Hotel prices also are reversing sharp declines from the shutdown, rising 1.1 percent in August after increases of 1.4 percent in June and 1.3 percent in July. They are still down by 13.1 percent over the last year.
We continue to see a slowing of rental inflation, with both the rent proper and owners’ equivalent rent indexes rising just 0.1 percent in August. The rent proper index has risen at a 2.1 percent annual rate comparing the last three months (June, July, and August) with the prior three months (March, April, May). This compares to annual rates of close to 3.7 percent for the rent proper index and 3.3 percent for the owners’ equivalent rent (OER) index before the pandemic. This slowdown is striking given evidence of more rapid increases in house sale prices since the pandemic.
The slowing of rental inflation is primarily in the high rent areas that had been seeing rapidly rising rents. In the New York metro area, the OER has risen by less than 0.2 percent over the last three months. In Seattle, the cumulative increase has been less than 0.4 percent. The index had been rising at an annual rate of close to 5 percent prior to the pandemic. In San Francisco, the cumulative rise has also been less than 0.4 percent over the last three months. In San Diego, it has been just over 0.2 percent. By contrast, there has been little change in the pace of rental inflation in Chicago and Detroit. Over the last year, the OER in Chicago is up by 3.2 percent, which is the same as its increase over the prior 12 months. In Detroit, it is up 2.8 percent over the last year, compared to 3.0 percent over the prior year.
While we need some more time to see if these trends persist, it does seem that there is some serious weakening in demand in the more high-priced areas which is not showing up in lower priced cities. This is consistent with a story of people responding to the pandemic and increased opportunities of working remotely by moving to lower cost areas.