Does Inflation Impact Rental Rates?

The initial effects of the COVID-19 pandemic were clear for all to see: businesses shutting their doors, quarantines, barren shelves at the grocery store, and a sudden rash of rental vacancies. While businesses have begun to reopen and we can find most essentials back in stock, the economy–and rental industry–have begun to bounce back. But in many ways the effects of the COVID-19 pandemic continue to linger, and a rise in consumer costs is one of them. But what is the relationship between inflation and rent? Does one impact the other, or are they completely separate?

What is Inflation, and What Causes It?

On a surface level, inflation can seem straightforward. The simple definition is a decrease in your money’s purchasing power over time. So, for instance, five dollars in 2022 probably won’t get you more than a fast-food burger. But back in 1922, it would have bought you and a friend a fancy meal (worth about $82 in today’s dollars, to be exact). The decrease in that money’s value over time results from inflation. However, determining inflation isn’t as simple as just looking at the price of food. Goods and services such as fuel, utilities, transportation, and housing fluctuate differently but still impact inflation. As a whole, economists attempt to calculate a single percentage to represent how money’s value has shifted across multiple markets.

Several factors can boost inflation. When demand outpaces supply, prices get higher because people will pay them. In other situations, an increase in the price of materials or components will cause the end cost of a good or service to rise as well. Lastly, when prices go up, wages often follow to maintain the same cost of living.

Using the Consumer Price Index

One of the primary ways to measure inflation is by looking at the Consumer Price Index (CPI). This measures the weighted average of a number of consumer goods, including transportation, food, medical care, and shelter. By tracking price changes of various goods and weighing their value compared to the other goods considered, economists use the CPI to assess changes in the cost of living.

Rent is included in the basket of services that the CPI measures and typically rises along with consumer goods. In fact, shelter composes a full 32 percent of the CPI basket, which gives it a considerable sway in the result. Inflation also makes new construction more expensive, limiting the amount of new competition among rental properties. In short, when the CPI goes up, it means rent has almost certainly increased as well.

The Connection Between Rent and Inflation

Once you understand inflation and how the CPI measures cost of living increases, it becomes far easier to understand the data about how rent and inflation interact. It’s not as simple as a basic cause and effect. The fact is that inflation influences rent, and rent influences inflation, in ways it can sometimes be challenging to track.

Inflation Increases Rent

As the cost of living increases, many landlords may need to raise the rent to keep up. Without matching rents to the decreasing value of money, landlords will see a reduced return on investment over time. On top of that, inflation causes the price of new construction to rise, which means that landlords will need to charge higher rents to compensate. As the market gets more expensive, so does rent.

Rent Increases Inflation

Rent has been going up steadily for decades, often at around three to five percent per year. As rent goes up, so does the CPI. Supply chain issues have played a major role in rising rents and inflation. But housing prices were rocketing upwards even before the COVID-19 crisis, which played a role in increasing rent and inflation. A historic supply deficit in housing over the past two decades has shrunk the supply and pushed up the demand for new housing, raising prices as a result. Low mortgage rates have also whipped up the fervor to buy, causing an unprecedented amount of competition for available housing. Overall, this means that rising rent can cause inflation to go up just as the opposite is true.

In Summary: Inflation and the Rental Market

As complicated as the interplay between prices and inflation may be, one thing is relatively simple: when inflation rises, rents usually will too. At the end of 2021, inflation rates were over 6 percent, and increased housing prices were no small part of that figure. The good news for property owners is that inflation can mean that your investment increases in value. But determining the correct market price for rent in your area can be as complicated as the different components of a CPI basket.

To strike a balance between keeping ahead of inflation without setting the price too high, you need a strong knowledge of your local rental market as well as keeping a weather eye on financial forecasts in the future. For many small landlords, that additional work can be a headache. That’s why working with a property manager is such a great option.

Choose a Portland Expert

Rent Portland Homes by Darla Andrew has worked with local landlords for years. Our knowledge of the Portland rental market is rooted in long-term experience in the area’s unique finances and circumstances. The COVID-19 pandemic has thrown a curveball at landlords all over the country, shaking up inflation rates and rental costs as well as adding a slew of new legislation to property owners’ plates.

Rather than staying up to date with all the confusing ups and downs of the rental market these days, working with us is a great way to cut down on your stress without sacrificing the quality of your property’s management. We handle everything, from finding you the best tenants and collecting rent to performing maintenance and repairs.

You’ll never need to worry about how the current inflation rate will impact your ROI again–and who doesn’t want to worry less? If you have questions about how we calculate our properties’ rental prices or how inflation can impact your investment, you can reach us by phone or text at (503) 515-3170 or send us a message through our website. We would love to hear from you!