How does Rent Factor into the Consumer Price Index (CPI)?
There’s a seemingly endless stream of new metrics being used to assess the multifamily market during its current run as the preferred real estate investment class. Let’s take a closer look at Consumer Price Index (CPI).
One economic tool which has stood the test of time is the shelter component of the Consumer Price Index (CPI). Provided by the U.S. Bureau of Labor Statistics (BLS), the shelter index is a measure of the costs associated with housing, not including investments and upgrades. It’s a major component of CPI — making up 32.8% of total CPI — and has been included since its inception in 1913.
The two main components of the shelter index are the owners’ equivalent rent of primary residence (23.8% of CPI) and rent of primary residence (5.9% of CPI). The cost of shelter for renter-occupied housing is rent, while owners’ equivalent rent measures homeowners’ expected rent if they were renting their homes in the current market. The majority of the rest of the shelter index is made up of lodging away from home expenditures, such as housing at school and hotels.
The BLS reported that the CPI index increased 1.4% during the 12 months ending in January 2016, before seasonal adjustment. The shelter index component rose 3.3%, while the rental equivalence index increased 3.2% and the rent index increased 3.7%.
Over the last five years, the shelter index has increased 13.5%, including 12.8% for the equivalence index and 16.1% for the rent index, while the CPI overall increased 7.6%.
The increase of the shelter index has played a role in leveling inflation overall by countering declines in energy prices, which fell 6.5% over the last 12 months.
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The shelter component of CPI is measured on a semi-annual basis, and averaged out to a monthly rate. Since household spending on shelter is not volatile, there can be a longer interval between pricing observations, as compared with other consumer items which require more frequent sampling.
Many analysts prefer to use rent data collection methods that are more frequent and have larger sample sizes, like those used by leading multifamily data providers, but the CPI continues to give a reliable macroeconomic view of how rent changes affect the economy.