Housing expenses are the largest component of the CPI, with a total weight of 42% in the index. This component has two sub-components: shelter and other housing-related expenses, with the former currently weighing around 33% in the total CPI and the latter about 9%. The fact that shelter costs have such a large weight in the overall CPI suggests that the index will be very sensitive to what happens in this component. Two CPI sub-indexes, Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent), measure the change in the shelter cost consumers receive from their primary residences. If we look at the latest data on rents, we can see that in the first quarter of 2021 there was a significant rebound after the strong declines in 2020 caused by the pandemic.
The level of rents has increased significantly since the beginning of 2021. Source: Zumper.com
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Rents in expensive markets have been growing at a very similar rate to 2019. Source: Zumper.com
It was correlated with the increase in the CPI index in the previous months.
Rent growth also contributed to the higher CPI figures in recent months. Source: XTB Research.
One can see that the upward movement was also continued in April. On year-over-year terms, the 1-bedroom median is up 2.1% while the 2-bedroom median is up 3.4%. Given the impact this component has on the overall CPI reading, it can be expected that the reading that will be released on Wednesday may also exceed analysts' forecasts. This, in turn, may put additional pressure on the Fed and push the central bank to start discussions on a possible reduction of its asset purchases.
