Climbing Housing Costs Could Prop Up Inflation for a While

Rents and other shelter costs are emerging as a major driver of overall consumer inflation, keeping it high at a time when many other sources are starting to ease.

Economists expect housing inflation to strengthen further before cooling off in the coming months, but are unsure of when relief will appear. This creates another challenge for the US Federal Reserve as it raises interest rates to reduce price pressures.

Overall annual inflation eased to 8.3% in August from 8.5% in July, according to the Labor Department’s consumer-price index. That reflected declines from the month before in prices for items such as gasoline, airfares and used cars, and slower price increases in other categories, such as groceries.

Housing was an outlier. Not only are shelter costs rising, they are climbing at an accelerating pace, accounting for a growing share of the overall inflation rate—about 25% of August’s rate, up from about 20% in February.

Shelter costs—comprising mostly rents and a gauge of home prices known as owners’ equivalent rent—rose 0.7% in August from the previous month, up from 0.5% in July. They rose 6.2% in August from a year before, up from 5.7% in July.

The price of housing “was always going to be a persistent boost to inflation this year,” said Omair Sharif, head of the advisory firm Inflation Insights LLC. “It has absolutely ticked up over the last three months and it is offsetting declines in things like airfares and hotel rates.”

Fed officials have raised interest rates this year at the fastest clip in decades to combat inflation, which hit a 40-year high in June. They are widely expected to lift rates by 0.75 percentage point after their two-day policy meeting concluding on Wednesday. That would be the third consecutive increase of that size.

Rising housing costs also increase the chances that the Fed will raise interest rates by 0.75 percentage point again at its November policy meeting, economists at Barclays wrote in a report for clients.

Economists and firms tracking private data expect housing inflation in the CPI to cool eventually because the rent increases they see in new leases appear to be slowing. That should show up in the CPI with a lag because of the way it is constructed, they say. Most of the time, most renters pay the same price every month, while those who renew their lease or sign new ones are more likely to see an increase. Private firms, such as Apartment List Inc., which tracks rental prices, record only the rent amounts in new leases.

By this method, the median US rent increased 10% in August from the previous year, down from a recent peak of 18% in November 2021, according to data from Apartment List.

The CPI’s rent component, in contrast, is estimated based on rents paid across the market, which includes rents raised months ago.

Home prices surged during the pandemic, boosted by low mortgage rates, changes in home-buying preferences, population trends and low inventories of homes for sale.

But government agencies don’t take home prices directly into account when calculating inflation because they consider a home purchase to be a long-term investment rather than a consumer good.

Instead, the CPI uses rents to create its estimate of homeowners’ housing costs—called owners’ equivalent rent—which calculates the imputed rent, or what homeowners would have to pay each month to rent their own house.

Because rents rose strongly over the past year, those increases are now feeding into the CPI and other inflation measures.

The private estimates offer hope that housing inflation in the CPI will slow at some point, said Igor Popov, chief economist at Apartment List.

“On the one hand there’s some confidence that the shelter component of CPI is not going to completely run away from us,” he said. “On the other hand, there’s a growing concern that in the meantime, the shelter component’s really propping up inflation at a time when these numbers are under a microscope.”

Mr. Sharif said shelter cost increases should begin to cool either in the fourth quarter of 2022 or the first quarter of 2023. Barclays economists say it will happen this fall. Brett Ryan, senior economist at Deutsche Bank, estimates the peak won’t come until the second quarter of next year.

Economists at the Dallas Fed said in a paper published last month that they see a lag time of up to a year and a half between when market rents start to fall and when that decline shows up in the CPI.

Many luxury hotels only build on their gilded reputations with each passing decade. But others are less fortunate. Here are five long-gone grandes dames that fell from grace—and one that persists, but in a significantly diminished form.

The Proto-Marmont |

The Garden of Allah, Los Angeles

A magnet for celebrities, the Garden of Allah was once the scene-making equivalent of today’s Chateau Marmont. Frank Sinatra and Ava Gardner’s affair allegedly started there and Humphrey Bogart lived in one of its bungalows for a time.

Crimean expat Alla Nazimova leased a grand home in Hollywood after World War I, but soon turned it into a hotel, where she prioritised glamorous clientele. Others risked being ejected by guards and a fearsome dog dubbed the Hound of the Baskervilles. Demolished in the 1950s, the site’s now a parking lot.

The Failed Follow-Up |

Hotel Astor, New York City

The Astor family hoped to repeat their success when they opened this sequel to their megahit Waldorf Astoria hotel in 1904. It became an anchor of the nascent Theater District, buzzy (and naughty) enough to inspire Cole Porter to write in “High Society”: “Have you heard that Mimsie Starr…got pinched in the Astor Bar?”

That bar soon gained another reputation. “Gentlemen who preferred the company of other gentlemen would meet in a certain section of the bar,” said travel expert Henry Harteveldt of consulting firm Atmosphere Research. By the 1960s, the hotel had lost its lustre and was demolished; the 54-storey One Astor Plaza skyscraper was built in its place.

The Island Playground |

Santa Carolina Hotel, Bazaruto Archipelago, Mozambique

In the 1950s, colonial officers around Africa treated Mozambique as an off-duty playground. They flocked, in particular, to the Santa Carolina, a five-star hotel on a gorgeous archipelago off the country’s southern coast.

Run by a Portuguese businessman and his wife, the resort included an airstrip that ferried visitors in and out. Ask locals why the place was eventually reduced to rubble, and some whisper that the couple were cursed—and that’s why no one wanted to take over when the business collapsed in the ’70s. Today, seeing the abandoned, crumbled ruins and murals bleached by the sun, it’s hard to dismiss their superstitions entirely.

The Tourism Gimmick |

Bali Hai Raiatea, French Polynesia

The overwater bungalow, a shorthand for barefoot luxury around the world, began in French Polynesia—but not with the locals. Instead, it was a marketing gimmick cooked up by a trio of rascally Americans. They moved to French Polynesia in the late 1950s, and soon tried to capitalise on the newly built international airport and a looming tourism boom.

That proved difficult because their five-room hotel on the island of Raiatea lacked a beach. They devised a fix: building rooms on pontoons above the water. They were an instant phenomenon, spreading around the islands and the world—per fan site OverwaterBungalows.net , there are now more than 9,000 worldwide, from the Maldives to Mexico. That first property, though, is no more.

The New England Holdout |

Poland Springs Resort, Poland, Maine

The Ricker family started out as innkeepers, running a stagecoach stop in Maine in the 1790s. When Hiram Ricker took over the operation, the family expanded into the business by which it would make its fortune: water. Thanks to savvy marketing, by the 1870s, doctors were prescribing Poland Spring mineral water and die-hards were making pilgrimages to the source.

The Rickers opened the Poland Spring House in 1876, and eventually expanded it to include one of the earliest resort-based golf courses in the country, a barber shop, dance studio and music hall. By the turn of the century, it was among the most glamorous resort complexes in New England.

Mismanagement eventually forced its sale in 1962, and both the water operation and hospitality holdings went through several owners and operators. While the water venture retains its prominence, the hotel has weathered less well, becoming a pleasant—but far from luxurious—mid-market resort. Former NYU hospitality professor Bjorn Hanson says attempts at upgrading over the decades have been futile. “I was a consultant to a developer in the 1970s to return the resort to its ‘former glory,’ but it never happened.”