The Cleveland Federal Reserve has released a new simulation model predicting that rent inflation may remain elevated until mid-2026, provided key variables stay constant. The report highlights the disparity in rent increases between new and continuing tenants since the pandemic. While rents for new tenants surged rapidly during the pandemic, those for continuing tenants increased at a slower pace. According to the model, there is still a significant gap between these two groups' rents.
"Our estimated rent gap in September 2024 is just under 5.5 percent, suggesting that there remains a substantial amount of potential rent inflation to be passed through to continuing tenants," stated Lara Loewenstein, Jason Meyer, and Randal Verbrugge, authors of the report.
The model forecasts Consumer Price Index (CPI) rent inflation using factors such as new tenant rents, renter mobility rates, and how changes in new tenant rents affect continuing tenants. The baseline forecast suggests CPI rent inflation will exceed its pre-pandemic norm of about 3.5 percent until mid-2026. The report also presents alternative forecasts indicating potential risks on both sides of this prediction.
"Our baseline forecast implies that CPI rent inflation will remain above its prepandemic norm of about 3.5 percent until mid-2026. Our alternative forecasts highlight both upside and downside risks to this forecast," they write.
Rent inflation significantly contributes to CPI shelter inflation—the largest component of overall CPI inflation—explaining why overall CPI inflation remains high.
The Cleveland Fed operates as one of 12 regional Reserve Banks within the Federal Reserve System and plays an active role in monetary policy formulation and community support across Ohio, parts of Pennsylvania, West Virginia, and Kentucky.
