The current environment offers one of the best chances in a long time for the US to generate inflation, driven by the fiscal and monetary response to the pandemic, the reversal of globalisation and moves towards improving social safety nets and redistributing money to lower earners. The key caveat had been that rents (the largest part of the US inflation basket) would be very weak for 2021, but the outlook appears more positive. 

Core CPI troughed in 2010 following the global financial crisis, driven by weakness in rents. This time, although rent indicators are weak relative to recent history, rents are still a positive upward contributor to the overall index. Rents are up 1.6 per cent in January versus a year earlier while US CPI and core CPI were both up 1.4 per cent. 

This week’s Chart Room shows house prices are soaring while rental prices (as represented by CPI Shelter) have increased at a slower pace. This has significance for inflation, given it is rents that are inputted into the CPI calculation, not home purchase prices.

Other signs also point to higher rents in 2021. We are starting to see rental demand rebound in the hardest hit cities. In New York during last November, there were more new leases signed than in any other November over the past decade, with Manhattan seeing a 30 per cent rise in leases compared to the same period in 2019. This comes after rental demand rebounded some months ago, except in the worst-affected cities. 

In addition, inventory of rentable housing fell for the first time since March, perhaps because soaring house prices are causing landlords to consider selling rather than letting their property. Over time, this decrease in the supply of rental properties relative to the number of homes for sale should cause the divergence in rental and sale price trends to narrow. 

Timothy Foster

Timothy Foster

Ben Deane

Ben Deane