UC Irvine economist thinks Federal Reserve misread rent inflation

Ed Coulson proposes new methodology for prices instead of months-old leases

UC Irvine Economist Thinks Fed Misread Rent Inflation
Center for Real Estate at UC Irvine's Ed Coulson (Center for Real Estate at UC Irvine, Getty)

The Federal Reserve should halt future interest rate hikes to stem inflation because the nation’s rent increases have already leveled off.

That’s the conclusion of Ed Coulson, director of the Center for Real Estate at UC Irvine, who believes the Fed waited too long to hike rates until a year after rents soared into the double digits in 2021, the Orange County Register reported.

Rent inflation plays an outsized role in determining the overall rate of inflation, the housing economist said. And the government’s method for measuring it is off, causing the Fed to misinterpret an important metric in the Consumer Price Index.

“The Fed’s policy is driven by their perceptions of inflation,” Coulson told the newspaper in a question-and-answer interview. “And I argue with some co-authors that that perception is incorrect.

“And the reason it’s incorrect, ironically, has to do with the housing market.”

The problem, Coulson said, is that rent is the biggest component of the Consumer Price Index. Rent is weighted to take up 30 to 45 percent, depending on which measure of inflation is used.

One issue with assessing the inflationary cost of rent is that current rents are based on leases signed six, eight, or 10 months ago, he said. 

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“So, it is very sluggish and lags the true state of the housing market by six months at least,” Coulson said.

If the Fed had measured inflation properly, Coulson added, it probably would have raised rates much sooner. And it should stop raising interest rates now because rents have leveled off. 

In fact, the nation’s measure of current rental inflation is zero — when the Fed still measures it at 3 to 4 percent.

Asked if rent inflation should be based on new leases for vacant units, the economics professor at the Paul Merage School of Business said: “That’s what you want.

“We have a more recent technique, which simply takes Real Capital Analytics data on the multifamily market, and we can convert that into an apartment rent inflation index,” Coulson told the Register. “And if you input that into the CPI and take out the Fed’s rental measure, it shows a drop in the rental inflation rate.”

— Dana Bartholomew

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