During the current round of policy tightening, core inflation has declined from its 6.6% peak in 2022 to 3.8%. One crucial factor as to whether this cooldown will continue lies in the cooling of rent inflation, which accounts for a significant 30-40% of core CPI.

For this week’s spotlight, we look at the New Tenant Rent Index, a leading indicator that is great for assessing the future trajectory of housing inflation.

What is the New Tenant Rent Index?

Housing inflation is primarily driven by the shelter component, which measures changes in all types of rents, including new leases, renewals, and rents in the middle of a lease. However, since rental contracts typically last for 6-12 months, rent inflation data exhibits a lag in reflecting changes in rent prices. For example, someone who signed a one-year lease at a higher rate in January won't see a lower price until their lease renews, even if rents have gone down in the meantime.

In contrast, the New Tenant Rent Index by the BLS only tracks rents for new tenants, offering a more immediate reflection of price changes in the housing market. As shown in the chart, year-on-year (YoY) growth in the index leads overall rent inflation by approximately 6-12 months, making it an effective leading indicator for rent inflation trends. (Note that the New Tenant Rent Index is shifted forward by three quarters to better visualize the correlation)

MM Takeaways

Looking at the latest data, the YoY growth of the New Tenant Rent Index continues to decline, with the latest 2024Q1 reading reaching 0.42%, a new low since 2010. This suggests policy tightening is working and curbing rent inflation. Based on the index’s characteristic of leading rent inflation by 6-12 months, rent inflation is expected to continue to cool for at least until the end of the third quarter this year.

Bonus: How to Make This Chart

This chart is created using the “Lead/Lag” function in the MacroMicro Toolbox. To identify leading-lagging relationship, we can horizontally shift an indicator forward or backward by a specific period to see how two series might line up.

To do that for the New Tenant Rent Index, go to the “Items” tab, select the “Lead/Lag” function under the “Operation” dropdown menu for the index, and set the n value to 3, representing three quarters forward. Try that out here!

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