Canada among nations fighting rising rent in global inflation battle
CENTRAL BANKS HANDCUFFED BY CURRENT INCREASES
IF STRENGTH IN ANY SEGMENT OF THE CPI PERSISTS FOR LONG ENOUGH, IT RISKS FUELLING A RISE IN INFLATION EXPECTATIONS THAT WILL FEED INTO THE CPI MORE BROADLY.
— DEUTSCHE BANK AG ECONOMIST PHIL ODONAGHOE
Surging rents across many developed economies are proving to be a stubborn hurdle for central banks as they struggle to nail down inflation once and for all in this tightening cycle.
In the United States, United Kingdom, Canada and Australia, rapidly rising housing costs — which have a hefty weighting in consumer price index baskets — are preventing inflation from declining closer to central banks’ targeted levels. The danger is that workers will demand even fatter paycheques to deal with the cost-of-living squeeze, undermining the inflation fight even further.
The upshot: The disinflation momentum seen through most of last year has all but stalled in some developed economies. That’s leading financial markets to either push back bets for interest-rate cuts, as seen in the U.S., or reinstate odds for further rate hikes, as is the case in Australia.
“Rents, like inflation, are a bit of a lagging indicator of the economic cycle and will be one of the last things to turn down,” said Shane Oliver, chief economist at AMP Ltd. in Sydney.
The problem is far from uniform and less of an issue in continental Europe, Oliver said, and worse in countries with rapid immigration programs and building shortages.
Australia meets both those criteria. Reserve Bank Governor Michele Bullock on Tuesday said strong immigration in recent years has “certainly added pressure on the housing market and that’s working its way out in rents.” The RBA, in its quarterly update of economic forecasts released the same day, said rent inflation is expected to “remain high” through at least mid-2026.
The decline in core inflation seen in Australia since early 2023 has come to an “abrupt halt,” in part due to rising rental costs, said Phil Odonaghoe, an economist at Deutsche Bank AG.
Data from property consultancy Corelogic Inc. this week showed Australia’s median rent hit a record high of A$627 (US$414) a week in April, climbing 8.5 per cent from a year ago.
“If strength in any segment of the CPI persists for long enough, it risks fuelling a rise in inflation expectations that will feed into the CPI more broadly,” he said. “The risks of that happening are far from trivial.”
From a year ago, rent inflation rose 7.7 per cent in the first three months of 2024, remaining around the highest in the 30 years the RBA has been targeting inflation. Excluding housing, Australia’s annual CPI was 3.2 per cent — 0.4 points less than the headline number and within sight of the bank’s two to three per cent target. Soaring rents are a major pain point for U.K. families as well and a key voter issue ahead of a general election expected later this year.
U.K. rent prices — up by a fifth since 2022 — are now rising at their fastest pace on record after high mortgage costs forced prospective homebuyers back into the rental market, exacerbating a housing supply shortage stemming from decades of underinvestment. Rents are set to increase by 13 per cent over the next three years, outpacing pay growth, according to an analysis by the Resolution Foundation. Still, the Bank of England has other fish to fry. Governor Andrew Bailey and his colleagues have turned their focus on pay growth and services inflation, which remain too hot for comfort. If those metrics cool down, together with goods inflation already below one per cent, they could counterbalance rising rent costs and bring inflation back to the two per cent target.
“Given the importance of rents in the CPI basket, if they continue to rise at a rate faster than the BOE’S target, they will clearly add to price pressure,” said Tera Allas, director of research and economics at Mckinsey in the U.K. However, BOE officials “may be more concerned about those items and sectors where inflation is clearly driven by domestic wage or profit pressures, such as hospitality.” The U.K. central bank is widely expected by economists to keep rates at a 16-year high of 5.25 per cent on Thursday, with investors watching for clues on whether policymakers see June or August as an opportunity to begin cutting.
RENT A TOP PRIORITY
Rental costs remain front and centre for the U.S. Federal Reserve too as officials wait for a window to bring down borrowing costs. Rent accounts for around one-third of the CPI inflation index, making it one of the biggest drivers of prices. Core CPI, which excludes food and energy costs, topped forecasts for a third straight month in March, in part due to gains in rents.
Fed Chairperson Jerome Powell has said he expects easing rental costs to eventually show up in broader price data, allowing policymakers at some point to lower rates.
“I am confident that as long as market rents remain low, this is going to show up in measured inflation,” Powell told reporters last week after the Fed’s twoday policy meeting. The central bank held rates at a more than two-decade high, while signalling a desire to cut when confident that inflation is under control. Traders are currently betting on at least one 25-basispoint rate cut this year.
Still, Powell may have to wait. Household expectations about the change in the cost of rent have risen sharply from last year, with rental costs expected to increase by 1.5 percentage points to 9.7 per cent for the next year, according to a survey by the New York Fed released Monday.
A shortage of housing stock — in part due to high interest rates — has kept prices elevated.
“Housing is a real problem in the United States due to a huge shortage of affordable housing, and in part because of high interest rates,” Treasury Secretary Janet Yellen told Bloomberg. “That said, I strongly believe — I think it is highly likely — that shelter costs, which have been pushing up inflation, will come down.”
While inflation may moderate from here, it’s unlikely that there will be significant cooling, according to Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets LLC.
“If this projection is correct, then the FOMC has its work cut out for it in getting core inflation back to two per cent,” he said.
HOUSING IS A REAL PROBLEM IN THE UNITED STATES.