Rising Rents Could Be the Spark That Reignites Inflation

Vacancy rates have been declining at apartments around the U.S., and that means that rents are climbing -- and likely will head even higher in the next year.Vacancy rates have been declining at apartment buildings across the U.S., sending rents sharply higher. And those higher rents could translate into a doubling of the inflation rate this year.

According to the U.S. Census Bureau, vacancy rates at residential buildings fell to 9.4% in the fourth quarter of 2010, down from 10.3% in the third quarter. "That was basically one of the largest quarterly declines ever," says Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

For the full year, the decline amounted to 1.3%, the second-largest on record. "In the grand scheme of things, 9.4% is still relatively high, but you have to go back to 2003 to find where we were lower," LaVorgna says.

How Rents Figure Into Inflation

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Any shortage of supply usually translates into higher prices, and rents have proven no different. Rents for primary residences have grown 2% in the last three months, while overall rents are up 1%. "Given where vacancies are, these rental trends are going to accelerate," LaVorgna says.

Higher rents not only hurt the pocketbook, but also increase the inflation rate. Retirees, who get annual Social Security raises based on the inflation rate, have seen no hikes for the past two years because inflation is so low. This makes life doubly difficult for retirees whose rents are going in the opposite direction.

For sure, food and gas prices have also been skyrocketing this year. They hit an all-time high in January, according to the U.N. Food and Agricultural Organization, and have helped to ignite protests in Tunisia, where the president was ousted, and in Egypt, where the president is under mounting pressure to resign.

But those commodities aren't included in the so-called core consumer price index that the Federal Reserve uses to decide whether or not to increase interest rates. But housing makes up 40% of the core inflation calculation.

Thanks to the rise in rents, LaVorgna now predicts inflation will double to 1.6% in 2011 from last year's 0.8%. That would still remain well below Europe's relatively raging 2.4%. But LaVorgna believes the inflation rate in the U.S. could hit 2% by the end of the year, which is the level the Federal Reserve is targeting.

Preventing Deflation

The Fed has been worried that inflation has been so low that prices might fall into a downward spiral known as deflation, a phenomenon similar to what has crippled Japan's economy for more than a decade. "Two percent inflation would be good because we won't have to worry about deflation anymore," LaVorgna says.

Until those worries are removed, the Fed is unlikely to consider raising interest rates. But market forces seem to be pushing them higher, causing big losses for investors in fixed-income securities, like bonds. America's low interest rate policy has also helped push down the value of the dollar on international markets.

Now, falling vacancy rates and rising rents could start pushing inflation higher, adding to the dismay of bondholders as well as renters.

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Basically this article is written on a false premise...there are plenty of empty rental units in most areas...it is a renters market as it is a buyers marker...rental rates are derived from true market forces...Renter can only afford so much at whatever level..landlord cannot have an empty unit too long...negotiate..

February 10 2011 at 12:49 PM Report abuse rate up rate down Reply

believe it or not, that is the first good news for the housing industry, and anyone who owns a home, in a long time. Home values have a direct correlation to the basic cost of rent. This may be just what the doctor ordered to resolve our housing crisis

February 08 2011 at 12:44 PM Report abuse rate up rate down Reply
2 replies to davidcpasq's comment

the only good news the housing industry can get is when foreclosures reach normal levels....at least 5 more years if not longer.....

February 10 2011 at 12:50 PM Report abuse rate up rate down Reply

"The rents too damn high."--Jimmy McMilan. I guess that just about says it all.

February 08 2011 at 9:38 AM Report abuse -1 rate up rate down Reply
2 replies to evd10's comment

Inflation is racing higher--thanks obama. Drill in America !!

February 08 2011 at 8:06 AM Report abuse +2 rate up rate down Reply
1 reply to marine1942's comment


February 08 2011 at 7:33 AM Report abuse rate up rate down Reply
1 reply to bravo8222's comment
Robert & Lisa

The rich keep getting richer and the middle class and the poor keep getting poorer. The last two years more so than ever. Still think Obama and the corrupt Demoncrat thugs are the answer? There is a reason the elite, rich man, George Soros and his corrupt, evil, rich cohorts are supporting the unions and the corrupt Demoncrat politicians. After being brainwashed by our Socialist Government Educational system, are you smart enough to understand why?

February 08 2011 at 6:38 AM Report abuse rate up rate down Reply
2 replies to Robert & Lisa's comment

Robert & Lisa - The growth in income and wealth disparity that you are pointing out is something that was set in motion by the economic and tax policies of Regan. And, just what does this have to do with rents and inflation going up?

February 08 2011 at 7:43 AM Report abuse -1 rate up rate down Reply

The Fed printing more and more money, the Socialist agenda of this Chicago thug of a clown in the white house spending more money than we can pay off. That is the true cause of our inflation.

February 08 2011 at 6:21 AM Report abuse +2 rate up rate down Reply
1 reply to granaryst's comment

Maybe Obama can borrow some funds from his "good ole pal" of a buddy J.P. Morgan Chase CEO Jamie Demon.

February 08 2011 at 9:47 AM Report abuse +1 rate up rate down Reply

If rents go up landlords could start being the targets of some of these shooters we've been reading about. One good target could be their big conventions that they have. So all you landlords out there.. you better not raise any rents,, you might just not make it through to see your next bunch of rent checks. There's a lot of Pssed off people out there. And you're one of the reasons why they are! You should be Lowering the rents. That might stop some of the crime we are so engulfed in, here in the United States. Some people have to rob other people to get their rents. You raise rents, you raise the amounts of robberies. Landlords don't care where you get your money. Just as long as they get paid. You should give us our country back,,, and sell all the renters your properties, because you don't deserve them. Landlords are ruining our country, they should all be jailed and the properties should be offered for sale to all renters. Clean this country up. Landlord rent (and property taxes) is the cause of nearly all the money problems. The jails should be full of landlords instead of created criminals that are trying to get their rent money by stealing from others. What do you think's 'gonna happen if peoples rent goes up!!!/??????! Do you landlords think people (like me) are going to stand still like good little payerpayerpayers??/~! Why do you think that they get management companies to get their rents. They know they are targets. And they know that 99.999999% of the country that is payingpayingpaying is all asleep and afraid, to do anything. You landlords are really pushing it! You better watch it! People will be at your homes bashing through and pulling you out kicking and screaming,,, "no nooo NOOOOOOOO AHHHHHHHH" YEAH, THATS what you deserve, and that's what will happen if you raise rents. We'll be reading about you landlords getting real justice on these news pages.

February 08 2011 at 4:45 AM Report abuse -3 rate up rate down Reply
1 reply to kadoupy's comment

Bad socialist economic policy are the cause of our problems, not landlords. You don't have to rent from bad landlords. We have a rental house that we used to live in. It is twice as big as the apartment that the people who rent it live in and we charge $100 a month less... There's good and bad in every mix so don't put us all in the same group...

February 08 2011 at 6:29 AM Report abuse rate up rate down Reply

The experts in this country are idiots. Stop listening to them America. You are being sold a phoney bill of goods. Inflation is a direct corelation to the economic policies set out by the morons running this country, not your landlord.

February 08 2011 at 2:53 AM Report abuse +2 rate up rate down Reply
1 reply to john's comment

A better term for them is educated fools instead of idiots but yes john, you are right.

February 08 2011 at 6:22 AM Report abuse +3 rate up rate down Reply

This makes no sence. How about the value of the dollar and the fact that much of the corn we grow is now being turned into ethanal, which I might add takes more crude oil to make than gasoline and how about the fact that we have the highest coroprate tax in the indutialized world. I would think those things are having a greater effect on inflation than rising rents, genious.

February 08 2011 at 2:50 AM Report abuse -4 rate up rate down Reply
1 reply to john's comment

Corporations have Tax Lawyers,they pay No taxes!!!

February 08 2011 at 6:51 AM Report abuse rate up rate down Reply