Model predicts rent inflation will remain elevated until mid-2026 if key variables hold steady

A new Cleveland Fed simulation model suggests that rent inflation may not return to its prepandemic norm until mid-2026, assuming a few key variables hold steady.

While new tenants saw rents rise quickly during the pandemic, continuing tenants saw slower increases and, according to the model, still have some catching up to do: The estimated gap between rent for new and continuing tenants is still notably wider than it was prepandemic, when it was just above 1 percent, according to a report describing the model’s findings.

“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,” write the report’s authors, Lara Loewenstein, Jason Meyer and Randal Verbrugge.

The model forecasts CPI rent inflation using new tenant rents, renter mobility rates, and an estimated rate at which changes in new tenant rents pass through to continuing tenants. The baseline forecast uses the most recent values for those factors. The report also includes alternative forecasts that chart the path of CPI rent inflation assuming the factors come in relatively high or low based on recent history.

“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 is a key contributor to CPI shelter inflation, which is the largest component of overall CPI inflation and is the main reason why overall CPI inflation remains elevated.

Read the Economic Commentary: New-Tenant Rent Passthrough and the Future of Rent Inflation